There is no end to the world of magic numbers: six feet is "tall," a 50-inch girth is "stocky," and seven and 11 are "winners."
In the mortgage field the magic number is 13, the country's mortgage bankers agree. When mortgage interest rates dropped below 13% last November, the bloom went off the Adjustable Rate Mortgage faster than a nighttime frost dissipating in the morning sun. Back in favor was the fixed rate mortgage.
As recently as early last year about 65% of all single-family mortgages written--as many as 76% of the mortgages insured by the largest company in the field, Mortgage Guaranty Insurance Co. (MGIC)--were ARMs. At present, however, ARMs account for only about 46% of all single-family mortgages.
An examination of where the Adjustable Rate Mortgage has been, and where its future lies, dominated a secondary-market conference here which was sponsored by the Mortgage Bankers Assn. of America at the Century Plaza Hotel.
Predicting the Future
--ARMs performed an invaluable service when they emerged, in strength, in 1981.
--Despite the recent drop-off in interest in them, they will always be around regardless of where the actual "market rate" for mortgages lies.
--Despite some "suspicions and fears of ARMs planted by the media," the consumer, generally, neither distrusts, nor finds the ARM concept, complex.
--"Teaser rates," or start-up mortgage interest rates that are unrealistically below current market rates, are a dead issue since mortgage insurance companies will no longer insure lenders against default in the face of the severe "payment shock" experienced by home buyers when their introductory interest rate is adjusted to the prevailing rate.
"In 1981," Thomas LaMalfa, a vice president with Milwaukee-based MGIC and a panelist at the conference said, "the housing market was on its knees when the comptroller of the currency and the Federal Home Loan Bank Board approved the Adjustable Rate Mortgage--a move that I doubt would have come about had it required congressional action.
"When the fixed-mortgage interest rate went above 13%, the ARMs opened up the housing market for another 6.5 million home buyers--20% of the market--by making them eligible for home ownership."
At one time in the short history of the ARMs, according to fellowpanelist James Perry, president of New York's Norton Government Securities, there were more than 225 variations of the adjustable mortgage on the market, "but we're getting far more standardized now and it has become increasingly important, from the consumer's standpoint, to keep them as simple as possible."
The standard that is taking shape, LaMalfa added, "is the ARM with a one-year adjustment with an index that is based on the one-year, constant, Treasury index, an overall 'cap' over the life of the mortgage of 5% to 6% and an annual 'cap' of 2%."
The standard "margin" that has emerged--the gap between the index and the offering rate that constitutes the lender's costs and profit margin--is 225 to 300 basis points (2.25% to 3%) and the average ARM is offered to home buyers at "about 200 to 300 points below the current fixed-rate mortgage," LaMalfa and Perry agreed.
If the "below-market" ARM is offered at a time when fixed-rate mortgages are available at say, 14%, the panel was asked in a subsequent press conference, it presupposes an ARM rate of 11% to 12% and raises the question: At what point below that does an initial-offering interest rate become a "teaser" rate?
"It's a hard question to answer, definitively," Perry said, "but we've seen initial rates offered at about 7 3/4% and then, a year later when they were adjusted to the going ARM rate of 11%--resulting in a jump in monthly payments from about $500 to $800--I think anyone, realistically, would have to call that a real 'payment shock.' "
Actually, the "magic" 13% fixed-rate mortgage--below which the public's interest in ARMs slackened sharply--"isn't all that 'magical' at all," Perry conceded. "It's largely psychological. That's where the balance shifted when rates started coming down, but it doesn't necessarily follow that it will on the upside--it could be entirely wrong. We had the same sort of thing in the mid-70s when the market couldn't seem to cross the 10% mortgage interest level. These things change."
One thing that has definitely changed, the panelists said, is the home buyer's indifference to the terms of the ARM he has signed up for--an indifference born of his anticipation of moving up in the housing market in a year or two--before an unfavorable ARM could hurt him--on the basis of his improved equity.
"The appreciation in the cash value of homes all across the country," LaMalfa said, "is down sharply, as the drop in loan originations shows. The public now realizes that it may be in the house it has bought longer than it would have been, normally."
The MBA's prediction that an increase in fixed-rate mortgages above the 13% level, in LaMalfa's words, "will show a dramatic new growth in ARMs," was, perhaps, prophetic since, even as the loan-origination group was meeting here, interest rates were doing that very thing.
"Fixed rates are now up to about 13 3/8%," Joel Singer, the California Assn. of Realtors' director of research, said a few days after the MBA concluded its conference, "and while the market is more sustainable today than it was a year or two ago, that interest rate is still awfully high.
"And I can't really agree with the mortgage bankers that the return to ARMs is going to be all that dramatic. Word-of-mouth experiences with them have cooled off a lot of people."
In an economy where the average home is appreciating at a rate of "only about 2% or 3% a year and the inflation rate is only about 4% a year, 13% or 13 3/8% is a very high mortgage interest rate in real terms," Singer added.
With the "magic" 13% level now cracking on the upside--and the "real" rate going up accordingly--will the floodgate once again open up for the ARMs, as predicted?