Fed cuts interest rates, but lenders still wary

The Federal Reserve wants you to borrow – but your local bank may not be as enthusiastic.

Thenation's central banker has now lowered short-term interest rates tothe point that borrowing, especially for banks, is now essentiallyfree. Yes, free. Adjusted for inflation, interest rates – especiallyafter the Fed lowered rates by three-quarters of a percent on Tuesday –are now negative, meaning that the amount of money borrowed today isworth less when paid back.

But if you are hunting for amortgage, the rate is higher than a month ago. The same is true for afive-year loan, which a small-business owner might take out.

The reason? Banks are demanding more profit from each loan.

"Thismay sound coldhearted, kind of Snidely Whiplash, but the banks areadding margin between riskless Treasuries and their riskier loans,"says Gregory Miller, chief economist at SunTrust Banks in Atlanta."They are not doing it to be mean; they are doing it to remain viable."For example, a month ago a 30-year fixed-rate mortgage average contractinterest rate was as low as 5.61 percent, according to the MortgageBankers Association. Today, the same loan is about 5.98 percent. Afive-year business loan is now about 0.10 percentage points higher thanit was a month ago.

Not only are rates rising, but bankloan standards have tightened, according to a recent Federal ReserveBoard survey. Or, as Mr. Miller puts it, "I don't know how topolitically say this but banks don't want to lend any money."

Butthat may change. On Wednesday, the Office of Federal Housing EnterpriseOversight relaxed the capital requirements on Fannie Mae and FreddieMac. According to some estimates this will provide up to $200 billionin additional mortgage money this year and help struggling homeownersrefinance their homes.

Some very short-term interestrates, especially credit-card rates, are starting to budge. Accordingto LowCards.com, interest rates on variable-rate credit cards – abouthalf of the credit cards in use – have dropped about 3 percentagepoints. On a $5,000 balance, this would save about $150 a year.

"Thecaveat is that the bank is under no obligation to drop the interestrate; they can not drop it and make more margin," says Bill Hardekopf,CEO of LowCards. "The rate reductions are probably not being carriedover as much as the consumer would like."

But someanalysts anticipate that once banks start to get their balance sheetsin order, they will begin to compete for small-business loans onceagain. "Once the credit crisis is resolved, the interest spreads [thedifference between the most credit-worthy borrowers and those withlower credit ratings] will narrow and small business will be able toborrow," says Doug Roberts of Channel Capital Research Institute inShrewsbury, N.J.

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