Surging Home-Loan Rates Burst Through 10% Level

Mirroring turmoil in international financial markets, fixed interest rates on home loans have surged in the last two days, bursting through the 10% level in many cases and shattering predictions that mortgage rates would remain relatively stable this year.

Rates on many conventional long-term mortgages jumped three-tenths of a percentage point on Friday alone, and the Veterans Administration contributed to the upward trend by raising the maximum interest on its federally backed loans to 9.5% from 8.5%.

“The last two days have just been awful,” said George Francis, a senior vice president at Metmor Financial, a large mortgage banking company in Los Angeles.

If the rise in mortgage rates continues, it is certain to create unease among consumers and may disrupt the spring home-buying season. The trend in rates may also undermine plans by many homeowners to refinance their existing mortgages at a lower interest rate.

But the upward movement may be a short-term reaction that could moderate in the days and weeks ahead, some lending specialists believe.

“We think lenders have overreacted,” said Paul A. Ruffin, vice president of Real/Net, a mortgage information company in Concord, Calif. “We feel the rates will settle back down to 9 3/8% to 9 1/2% in the next couple of weeks.”

The recent rate surge has punctured the euphoria in the real estate market that has lasted since fall, when rates started falling below 10%. Rates have been in general decline since the summer of 1984, although they rose briefly last summer after a surge in home-loan refinancings.

“We had been lulled into a feeling of complacency,” said Tim Howard, chief economist for the Federal National Mortgage Assn. “(Rates) hadn’t been moving much and hadn’t been expected to.”

So nervous was the mortgage market that some lenders changed their rates three and four times Thursday and Friday, according to Richard Betchley, president of Compufund Network Funding in Pleasanton, Calif.

“The market is so volatile that lenders were adding an eighth to a quarter of a percentage point just to protect themselves,” Betchley said.

Falling Dollar Cited

Although mortgage rates have been rising since early in the month, the pace accelerated dramatically late this week as the U.S. dollar continued to lose strength against the Japanese yen. Interest rates rose markedly and bond prices fell in the expectation that the Federal Reserve would force rates up in order to keep foreign investors from dumping securities denominated in dollars.

“I’ve been in this business 14 years, and this is the first time I’ve seen the mortgage market move this quickly in concert with the international market,” said Betchley, the Compufund executive.

Fixed home-loan rates are closely tied to long-term government securities. When rates on long-term Treasury securities rise sharply, the impact ripples through the mortgage-security and home-loan market.

Among those who aren’t being hurt in the confusion are consumers seeking adjustable-rate loans or those who have obtained commitments from lenders for mortgage loans at a specified fixed rate, lending specialists say.

Adjustable Rates Pushed

Adjustable-rate mortgage loans have remained relatively steady in the last two weeks, partly because lenders promote them as a way to lessen their exposure to interest rate fluctuations.

“This makes adjustable-rate mortgages much more attractive and allows the banks to shift the credit-rate risk to the buyers during the heavy spring buying season,” said Robert K. Heady, publisher of Bank Rate Monitor in North Palm Beach, Fla.

The principal losers appear to be borrowers who have applied for fixed-rate loans but did not obtain a commitment on the actual interest rate. Those borrowers now face the prospect of higher mortgage payments if the present rates stay where they are or rise.

Indeed, lenders may now have to fend off a torrent of criticism from consumers who were counting on getting fixed-rate home loans at well below 10%. “This is sure to spark consumer protests,” the chief financial officer of one large Los Angeles-area financial institution predicted.

Forecasts Off Mark

The increases have also jarred the interest rate forecasts of most mortgage economists, who had been saying that long-term fixed rates should go no higher than 10% in 1987. Some economists were still making those predictions early in the week.

A survey of 28 California financial institutions, conducted every Friday by The Times, showed that more than half now have fixed-rate, long-term mortgages with annual percentage rates higher than 10%. Two weeks ago, none were even close to double digits.