Lenders keep eye on Fed but don’t fret much yet

Banks and other financial institutions, contending in recent weeks with a global liquidity crunch spurred by the national collapse of the subprime housing market, are awaiting the Federal Reserve’s upcoming decision whether or not to cut short-term interest rates.

As mortgage lenders across the country foreclose at record levels on homeowners with adjustable-rate and other nontraditional mortgages, large financial institutions and private investors in the subprime market have pulled back from corporate-issued mortgage backed securities, making it hard for many major players in the secondary market to balance their books.

The resulting credit crunch and other economic indicators have rattled Wall Street, causing global markets to become especially volatile in recent weeks.

Global investors eagerly await the central bank’s decision on short-term rates. Lowering them would help to further calm the markets, experts at several local financial institutions said.

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“That’s probably the next big thing that could translate into a perception that the credit markets and interest rates are stabilizing,” said David Devault, chief financial officer at The Washington Trust Co.

Devault and chief lending officers at Citizens Bank, Bank Rhode Island and Navigant Credit Union all said their financial institutions have not been directly impacted by the liquidity crisis, because all maintain relatively conservative lending profiles and none were major players in the subprime market – either as lenders or investors in mortgage-backed securities.

Citizens Bank has not changed any of its underwriting criteria for either consumer or commercial loans at this point, said Joseph J. MarcAurele, chairman, president and CEO of Citizens Bank of Rhode Island.

“We didn’t play in the market of mortgage-backed securities,” MarcAurele said. “We were solidly underwriting these deals all along, and I think because of that we really didn’t have to change the way we did business.”

But as with financial institutions across the world, the local banks are contending with higher interest rates that have made their cost of doing business more expensive and could impact profits if the credit crisis continues.

As an example, the three-month LIBOR interest rate rose to 5.70 percent last week, up from 5.36 percent one month earlier – a significant increase of 34 basis points. Three-month Treasury rates, which were at 4.09 percent on Aug. 16, had risen to 4.38 percent last week, Devault said.

“No doubt there’s some modest increase in our borrowing costs, but we’re not heavily dependent on that as a financing source,” Devault said of Washington Trust. “The degree of the change is not something that in and of itself would dramatically change the operating results of the bank on that short-term basis. Over time, higher short-term rates could have an effect on profits. It’s been too brief a period of time to really translate into any meaningful longer-term effect at this point.”

The credit crunch and rising interest rates have combined to impact potential homebuyers in the market for “jumbo loans,” which are classified as mortgages for more than $417,000 and are not guaranteed by the federal housing agencies Fannie Mae and Freddie Mac.

Rates for 30-year, fixed-rate jumbo loans have shot up from 7.125 percent with no points in early July to 8.375 percent with 1.875 points as of last week, said Peter Walsh, senior vice president for retail lending and community relations at BankRI.

But interest rates on a traditional 30-year, fixed-rate mortgage loan under $417,000 have actually come down slightly in the same time period, from 6.875 percent on July 2 to 6.625 percent last week, he said.

Steep declines in home prices, stable interest rates for non-jumbo loans and the collapse of many nontraditional mortgage lenders are actually pushing more homebuyers – especially first-time homebuyers – to traditional lenders like BankRI and Navigant Credit Union in recent weeks, both financial institutions reported.

“It’s been a positive for us,” Fred Reinhardt, Navigant’s chief lending officer, said of the subprime mortgage meltdown and resulting liquidity crunch. “We’re actually doing a little bit more business.” •

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