Mortgage Rates Drop Below 9% in Continued Plunge
Frances Vincent seems to be in a no-lose situation these days when it comes to the interest rate on her home loan.
Payments on her adjustable-rate mortgage loan from California Federal Savings have plunged from $1,900 to $1,400 a month in less than two years. What was an 11.5% loan for her San Fernando Valley home is now at 8.5%.
But Vincent may refinance the mortgage loan that has been so kind to her pocketbook. Mortgages with fixed rates have also fallen so much that they may be too good to pass up, she figures.
“If I can get a fixed rate at 9%,” she said last week, “I think I’d take it.”
What Vincent is encountering is one of the pleasant options facing American homeowners and home buyers as interest rates on mortgage loans continue their welcome and unexpected plummet of the last several months.
Most experts had predicted that fixed-rate mortgages would drop to the mid-9% range by late 1986. But, thanks largely to continued low inflation and a languid economy, long-term mortgage rates have continued their fall beyond most expectations.
“It’s incredible to us,” said Ira Cohen, senior vice president of ARCS Mortgage, a mortgage lender in Canoga Park. “Nobody would have figured it a year ago.”
And, many consumers who thought they had bargain mortgages do not think so anymore.
“The fixed rate of 11% that looked like a good deal a year ago looks bad today,” said Sigmund Anderman, chief executive of CompuFund National Mortgage Network, a mortgage information company based in Pleasanton, Calif.
Advertised rates on fixed-rate mortgage loans have already fallen below 9% in some parts of the country, their lowest levels since the mid-1970s. Though the downward trend began in late 1984, it has accelerated in recent months.
American Savings & Loan, the nation’s largest savings and loan, jolted its competitors early last week by cutting its fixed-rate mortgage to 8.75% for 15-year loans and 9% for 30-year loans. Home Federal Savings & Loan, another large California S&L;, made a similar move later in the week.
Rates have fallen so far and fast that even veteran lenders cannot readily recall when they have been this attractive. American Savings has not had rates this low since 1977, a company spokesman said after researching old loan records.
“It’s been so long that I don’t remember anymore,” said George Francis, an executive vice president for Lomas & Nettleton, one of the country’s largest mortgage lending firms.
8% Rate Possible
Most lenders and economists expect mortgage rates to continue to move lower early in the year, perhaps by as much as half of a percentage point, before stabilizing and rising slightly toward year-end. That means that advertised fixed rates may dip as low as 8% in 1987.
“I don’t see much gyration over the next two years,” said John Tuccillo, chief economist for the National Council of Savings Institutions. “It’s clearly . . . a period of very favorable conditions for anything connected with housing.”
These predictions are usually made with the condition that nothing occur to upset the nation’s financial markets, such as a sharp rise in the price of oil. Some skeptics also fret because there is almost too much agreement about interest-rate stability.
“That’s the conventional wisdom,” said Joseph Humphrey, chief economist for the Federal Home Loan Bank of San Francisco, referring to the rate forecasts. “The only thing that worries me is the conventional wisdom is usually wrong.”
Refinancing Expected
If rates go down much further, some lenders expect another bout of home-loan refinancing like the one that swept the country last spring after fixed-rate mortgage loans slipped below 10% for a brief period. Many of those borrowers refinanced fixed-rate loans with interest rates as high as 16% and 17%.
“Rates are now well below where they were last spring that triggered the wave of refinancings,” said Robert Heady, publisher of the Bank Rate Monitor in North Palm Beach, Fla. Heady’s latest nationwide survey, the results of which were calculated in late December, showed average fixed rates at 9.24% for 15-year loans and 9.56% for 30-year loans.
Mortgage rates are likely to be volatile from week to week, experts caution, and another recent survey showed a slight increase. The Federal Home Loan Mortgage Corp. said last week that its survey found that the average rate for 30-year, fixed-rate loans rose to 9.37% during the week ended Jan. 2, contrasted with 9.30% the previous week.
The next refinancing wave, some believe, will be composed of consumers, like Vincent, who have adjustable-rate loans or those who have fixed rates of 11% or higher.
Homeowners who do refinance, however, should plan to stay in their homes long enough for the move to pay off. Though refinancing means lower monthly mortgage payments, it often costs several thousand dollars in fees.
Greater Gap
Lending experts also warn that the gap between advertised mortgage rates and real effective rates is greater than ever today.
The effective rates--what the consumer will really pay--may be 1 percentage point or more above the advertised rate after all fees and costs are included.
Indeed, unusually low mortgage rates usually include the stiff fees, known in lender argot as points. Lenders who offer fixed-rate loans at 8.5% today also charge as much as four points in fees. One point is equal to 1% of the loan amount and effectively boosts the interest rate on the mortgage by a quarter of a percentage point.
“The numbers of points are increasing,” Bank Rate Monitor publisher Heady warned. “So consumers need to be aware of . . . not just the interest rate that lenders are dangling in front of them.”
The Federal Home Loan Bank Board reported Thursday that the national average for fixed-rate mortgage loans stood at 10% in December with fees included in the rate calculation.
Advertised Rates
The advertised rates on fixed rates also typically apply only to so-called “conforming loans,” something consumers find out when they start asking for loan details.
Conforming loans are those up to a maximum of $153,100 that lenders may sell into the secondary market to agencies like the Federal Home Loan Mortgage Corp. and the Federal National Mortgage Assn. Those loans are usually converted into fixed-rate securities and resold to investors.
But fixed-rate loans higher than $153,100--a ceiling that only recently was raised from $133,250--are usually kept in lender portfolios. For that reason, they usually include significantly higher interest rates as a hedge against possible future rises in rates.
Some savings and loan firms, particularly large ones in California, make fixed-rate loans only reluctantly and one of the majors, Home Savings of America, does not make them at all.
Adjustables Promoted
Rather, they promote adjustable-rate loans by promising lower fees, faster loan-processing times and no prepayment penalties should the loan be paid off before it matures. They also have significantly lower introductory rates.
The latest Bank Rate Monitor shows that initial rates on adjustable-rate mortgages averaged 7.73% at the end of December. One savings bank in Philadelphia, Beneficial Mutual Savings, is offering an initial adjustable rate of 6.95%. Home Federal Savings just dropped its adjustable rate to 7.25%.
It is these lower rates, often called “teaser rates,” that make it easier for borrowers to qualify for loans and gives them lower initial mortgage payments.
In the case of 35-year-old Frances Vincent, she applied for an adjustable-rate loan in early 1985 largely because she did not have the salary to qualify for a $192,000 loan at what was then the prevailing fixed rate of 13%. A fixed-rate loan at the time would have cost her more than $2,100 a month.
“I did the right thing at the right time,” she says now, “but it was more luck than judgment.”
Healthy Windfalls
Consumers with adjustable-rate loans have reaped healthy windfalls in recent years. Great Western Savings in Beverly Hills estimates that its customers with adjustable mortgages have saved an average of $133 a month in the last year.
Adjustable-rate loans now account for about 25% of the nation’s mortgage volume, estimated Warren Lasko, executive vice president of the Mortgage Bankers Assn. At savings and loans companies, adjustable-rate lending accounted for 44% of total lending volume in November, according to the latest figures from the Federal Home Loan Bank Board.
For lenders in California, where adjustables are heavily promoted, about 70% of the mortgages made by savings and loans have rates that adjust periodically.
In some parts of the country, though, lenders have all but forsaken adjustable-rate loans. “We’d like to be writing adjustables but our consumers don’t want them,” a spokesman for Landmark Savings Assn. in Pittsburgh said.
Lenders Concerned
But such talk concerns some lenders, who believe that savings and loans are making the same mistakes they did in the early 1980s, when interest rates soared beyond 20%. The sharp surge ballooned the cost of deposits for the savings and loans and buried the industry in red ink for two years.
Savings and loans still possess far too many fixed-rate assets that will quickly turn into money-losers if interest rates spurt again, some say. Lending institutions cannot afford to bet on the direction of interest rates, they warn.
“I’m not smart enough to know where interest rates are really going,” said Herbert Sandler, chairman of World Savings & Loan in Oakland, “and anyone who thinks he does is a horse’s ass.”
