Panel Probes Slow Processing of Mortgages

People trying to buy new homes or refinance old ones are getting the fast shuffle from lending institutions because of chaotic changes in mortgage interest rates, a state Senate committee was told Tuesday.

“The mortgage rates quoted today are meaningless in terms of what the consumer might really have to pay,” said Herschel Elkins, senior assistant attorney general for consumer affairs.

He said some lending firms promise borrowers that they will observe the interest rate quoted the day the loan application is filed, knowing the promise won’t be honored when the deal closes three or four months later.

“It’s difficult to take legal action, because these are merely oral promises,” Elkins said. “It’s almost misleading to establish a loan price.”

Elkins testified at a hearing of the Senate’s Housing and Urban Affairs Committee, chaired by Sen. Leroy Greene (D-Sacramento).

Chaos in Interest Rates

Greene said the present chaos in mortgage interest rates is a new phenomenon that arose in March, when interest levels began to decline. That encouraged new homebuyers to enter the market, along with homeowners trying to refinance to escape high interest rates on existing home loans.

“We have never received such a volume of complaints before,” Elkins said. “This summer we were inundated with them. Five years ago, demand was predictable and there was a lot less variation in interest rates.”

Nationwide, the volume of mortgage loans in 1986 is expected to top $400 billion, up 60% over 1985. California will account for about one-fifth of the volume.

Greene said lending institutions have had trouble coping with the tidal wave of loan applications because they didn’t foresee it and didn’t have enough trained personnel to deal with it.

As a result, loans formerly processed in little more than a month now can take up to four months.

Interest rates can change substantially in that time, Greene said, and lenders don’t like to be tied to the interest rate that prevailed when the borrower first applied.

‘No Incentive to Close’

“The large backlog is a disincentive to keep the rate down,” Greene said. “If they (lenders) feel the interest rate is going up, they have no incentive to close.”

Greene said many mortgage applicants shop around for low interest rates. A bank or savings and loan institution with the lowest rate on any given day soon finds itself with a surfeit of applicants and promptly raises its rates.

Greene displayed charts showing the wide fluctuations in interest rates quoted in different months of this year by Sacramento area lenders.

Shirley Odom, a Santa Clara homeowner who described her experiences in refinancing her house, said at least two laws are needed to protect consumers.

She urged that a limit be set on the amount that a lender can raise the interest rate after an offer is made. She said legislation also is needed to make the report of an appraiser the property of the consumer rather than the lender.