Low Rates Bring In Borrowers

It's a borrower's world out there.

As confidence builds that America has entered an era of steady growth and low inflation, banks are offering interest rates that can't be refused. Consumers are signing up to refinance their homes, or roll credit-card debt into second mortgages.

The phone on Luke Hayden's desk is a good indicator of just how flush banks are these days. Until recently, it would light up all day as other Chase bankers would call the vice president of Chase Manhattan Mortgage in New York to complain about the interest rate he had decided to charge customers for loans.

But lately, Chase lenders have been so busy writing mortgage applications, Mr. Hayden's phone has been real quiet. Chase, like many other banks, is offering 7.75 percent now for a 30-year fixed mortgage. "No one has time to complain. The rates are very favorable," he says.

This borrowing environment isn't likely to change soon. The Federal Reserve, meeting in Washington yesterday, was expected to keep interest rates stable once more. The Fed has only hiked interest rates once this year - in March - for a miserly one-quarter of a percent. "The expectations are that they will not do anything, but they are likely to have a lively discussion about when they will have to do something," says Paul Kasriel, an economist at Northern Trust Company in Chicago.

Fed watchers say there is a developing split within the Fed over the need to hike rates. "Some members of the Fed believe that sometime soon it would be prudent to tap the monetary brakes ... to avoid a boom-bust scenario," says Mr. Kasriel.

BUT former Fed Governor Lyle Gramley says the central bank will sit pat until it sees evidence that the economy is reaccelerating. Economists will watch the September unemployment rate due out Oct. 3. Expectations are that the rate will be unchanged at 4.9 percent.

With the Fed sitting on the sidelines and inflation under control, long-term interest rates are slipping lower. Rates on 30-year fixed mortgages have dropped about three-quarters of a point in the past year. "This is a good time for borrowers, they can get credit relatively cheaply," says Keith Leggett at the American Bankers Association.

Gary Shoesmith, an economist at the Babson Graduate School of Business at Wake Forest University, is recommending that corporations also take advantage of the lower interest rates. "Now is a good time [for companies] to retire some older, higher priced debt and pick up some of the new stuff," he says.

Corporations are lining up for loans. But Tom Honig, a regional president for Norwest Corporation in Austin, Texas, says commercial borrowers are less focused on getting the lowest rate than on wringing concessions from the banks on terms, conditions, and availability of the loans. "The rates are very competitive at all the banks, so customers want convenience, a local presence, and the most amount of money they can get," Mr. Honig says.

But not all businesses or consumers should take on more debt, even with lower rates. "If you are barely making your payments, regardless of the price of money, you shouldn't borrow," says Jean Ann Fox at the Consumers Federation of America in Washington.

In fact, despite the low-inflation environment, interest rates on many credit cards are rising, says Robert McKinley, president of Frederick, Md.-based RAM Research Corp., which follows credit card trends. This is most noticeable in the form of higher "punitive rates" - averaging 25 percent per year - for those who are late making a payment or are over their credit limit. Associates National Bank, which is owned by Ford Motor Company, is charging a 32.6 percent punitive rate. "There are more complaints every day," he says.