The Fed Is Watched With Interest : Mortgage Rates Up on Fears of a Boost

Fears that federal regulators may soon push up short-term interest rates have prompted lenders in Southern California to raise their fixed mortgage rates by as much as half a percentage point and are forcing many people to rethink their investment strategies, financial experts said Wednesday.

“I’m already getting calls from investors, saying, ‘What am I going to do now that interest rates are going up?’ ” said Tom Gau, a financial planner in Torrance. “Some people are downright frantic.”

Federal Reserve Board Chairman Alan Greenspan indicated before Congress this week that the nation’s central bank may raise short-term interest rates to keep the economy from overheating. But he did not say when the Fed might act.

The Commerce Department said Wednesday that its chief gauge of future economic activity jumped again in December and that sales of new homes rose strongly, suggesting to some economists that the Fed will boost rates sooner rather than later.

“The bottom line is that as long as we see economic statistics coming on strongly, the market will have to adjust for an imminent Fed move,” said Dan Seto, an economist at Nikko Securities Co. International in New York.

The uncertainty has consumers scrambling to figure out how rising rates would affect their credit card debt, mortgage loans and savings accounts.

Consumers with adjustable-rate credit cards would probably be among the first to be hurt by a rise in short-term rates, analysts say, because their payments would rise almost immediately.

Car buyers could feel the pinch next, because many auto loans are tied to short-term rates.

Investors who recently took out long-term certificates of deposit would also suffer if rates rose, because inflation would eat up even more of their modest earnings.

Although some investors are clearly nervous about the prospects of further rate increases, there has been no broad selloff of stocks. Bond prices plunged after Greenspan made his remarks, but the market settled down Wednesday and recouped some of its losses.

Short-term rates could climb another quarter to half a point and still remain relatively low. If a rise in rates slows the economy and actually prolongs the recovery, it could extend the long rally in the stock market, said David Holt, director of technical research at Wedbush Morgan Securities in Los Angeles.

“The stock market is still the only game in town,” Holt said. “It’s hard to find a reason not to be in equities.”

Some cautious investors who have certificates of deposit about to mature say they will park their cash in interest-bearing money market funds for a while, until the direction of interest rates comes a little more into focus.

“I’m not a high roller, but I’ll be damned if I’m going to renew my CD for another six months if I don’t have a good idea of where interest rates are going to go,” said Donald Kravitz, a semi-retired sales clerk in Fullerton who has a $5,000 certificate of deposit that will mature next week.

Borrowers who have applied for loans to buy new homes or refinance existing mortgages are also in a quandary.

Most lenders have raised their rates by about a quarter of a percentage point since Monday, and a few have lifted rates by as much as half a point.

Rates on fixed, 30-year loans were averaging about 6.8% just a week ago, but they climbed to nearly 7% by Wednesday, according to Mortgage News Co., a Santa Ana-based company that tracks loans offered by 130 Southern California lenders.

The increase has added about $20 to the monthly payment on a $150,000 loan.

“A lot of borrowers are figuring that rates are a lot more likely to go up than down, so they’ve decided to stop playing the guessing game and are locking their rates in now,” said Bob Sheets, a mortgage broker and co-owner of Golden West Mortgage Co. in Woodland Hills.

Experts said the latest rate run-up could trigger yet another round of refinancings, as borrowers who have postponed replacing higher-rate mortgages finally take the plunge.

But some mortgage brokers and lenders say refinancing can’t be done as quickly as it could a month ago, because many financial institutions and appraisers have been swamped with earthquake-related work.