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Any Fed rate increase would have little impact on mortgages, Md. bankers say

“If anything, it’s (interest rate increases) a good sign that the economy is healthy and is growing,” said Scott Murphy, partner at portfolio manager at Tufton Capital Management. “It would show consumer confidence is back.” (Thinkstock)

“If anything, it’s (interest rate increases) a good sign that the economy is healthy and is growing,” says Scott Murphy, partner at portfolio manager at Tufton Capital Management. “It would show consumer confidence is back.” (Thinkstock)

The Federal Reserve has greatly changed its plans since it initially forecast as many as four rate increases throughout 2016 after raising rates late last year for the first time in nearly a decade.

Rate increases are likely only if the economy clearly is improving, which is why the financial services industry was watching last week’s jobs numbers with such great interest. Industry experts are anticipating the nation’s central banking system will approve a minor increase, maybe 25 basis points, by the end of the year.

“We’re not hanging on every word the Fed says,” says Dave Jacobin, president of 1st Mariner Bank’s mortgage division. “It doesn’t mean a whole lot in the mortgage world.”

“We’re not hanging on every word the Fed says,” says Dave Jacobin, president of 1st Mariner Bank’s mortgage division. “It doesn’t mean a whole lot in the mortgage world.”

Mortgages are typically tied to long-term rates, which are set by the bond market. The Federal Reserve controls short-term interest rates.

In the mortgage world, a short-term rate hike may lead to an eventual decrease in long-term interest rates, said Jacobin.

“Sometimes when you see a rate increase, the market digests the news and long-terms rates go down,” said Jacobin, adding that the other option is that long-term rates will remain unchanged. Either way, talks about rate increases shouldn’t make consumers feel as if they need to take out a mortgage before the Fed raises interest rates, he said.

For the most part, the hubbub around a Fed rate increase is more about getting a vote of confidence from the government that the economy is doing well. Interest rates represent the cost of money. Lower interest rates indicate less demand and, under extreme circumstances, possibly even deflation.

“If anything, it’s (interest rate increases) a good sign that the economy is healthy and is growing,” said Scott Murphy, partner at portfolio manager at Tufton Capital Management. “It would show consumer confidence is back.”

Low rates also encourage excessive risk taking on the part of borrowers.

“Things kind of get crazy when you’re giving money away for free,” said Murphy. “The true cost of money is virtually nothing.”

That said, Jacobin at 1st Mariner expects the Feds to take a close look at the economy in the next few months before raising rates. Last week’s jobs numbers showed little movement in job growth or in the unemployment rate, which has stayed below 5 percent, leading analysts to predict any rate hike is more likely in December than September.

“I think it’s smart for the Fed to say they will look at the economic environment to make a decision,” said Jacobin.

Tricia Brice, senior vice president and chief lending officer with Point Breeze Credit Union, said she and her colleagues were surprised at the initial projection that the Fed would impose four hikes this year.

“We were a little surprised so we weren’t really expecting that,” said Brice, who has a committee that meets on a regular basis to monitor possible movement in rates. She’s also not expecting an increase until the end of the year.

Consumer behavior in general is not tied to interest rates as much when it comes to lending, said Brice. Since the 2008 recession, consumers are more focused on what they can afford as opposed to how much money they can borrow from the bank.

“Consumers are much more informed and knowledgeable,” she said.


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