Mortgage Market Rocked by Surge in Interest Rates
The continued ascent of interest rates on fixed-rate home loans this month has cast a pall of confusion and anxiety over the nation’s mortgage market.
The unexpected rise has been particularly unnerving for borrowers, who have reacted by placing refinancing plans on hold, scrambling into adjustable-rate loans or rushing to buy homes before rates rise further.
From 9% to 9.5% levels in late March, the annual percentage rate on most fixed-rate mortgage loans is either approaching or has pushed through 11% in late April, their highest levels since last summer.
“It has been the farthest, quickest movement I’ve ever seen,” said John M. Teutsch, a veteran mortgage lender from Seattle.
“On the ‘Richter (earthquake) scale,’ ” he said, “this has been an 8.”
The rate rise has put an especially severe crimp in home-loan refinancings. These are borrowings designed to replace older, high-interest loans with new loans that have markedly lower monthly mortgage payments.
‘May Not Qualify’
A mortgage rate rise of 1.5 percentage points to 10.75% raises the monthly mortgage payment on a $100,000 loan by $111 to $933, according to ARCS Mortgage, a lender in Canoga Park.
“Although 10.75% is still a good fixed rate compared to some rates we have seen in this decade,” ARCS President Howard J. Levine said in a recent press release, “some borrowers may not be able to qualify for a loan at this rate.”
The fortunate customers are borrowers who obtained financing just before the steepest rises began in the middle of this month. “We are very lucky, and we know it,” said one Southern California woman, an artist, who managed to refinance her home loan at 8.875%.
But the changes have meant agony for borrowers who have seen rates soar while their loans are being processed. Take the case of 35-year-old Sue Williams, a resident of Rowland Heights east of Los Angeles.
Williams and her husband obtained preliminary approval for an 8% Veterans’ Administration loan with a fee of four points in an effort to refinance their 12.5% home loan. (One point is equivalent to 1% of the loan amount.)
The Bad News
On April 10, however, Williams received the bad news: The VA announced that it was raising the maximum rate on federally backed loans by a full percentage point. Williams said she is now faced with prospect of a 9% loan with an up-front payment of as many as seven points.
Williams has delayed closing the deal on the loan, hoping that the rate and points will settle down with time. “It’s kind of disappointing,” she said.
The rapid rise in rates has also shaken lenders, some of whom now face the prospect of sizable losses, lending experts say.
Most fixed-rate home loans are sold into the secondary market to agencies such as the Federal National Mortgage Assn. (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac). Fannie Mae and Freddie Mac, in turn, package these loans into pools of mortgage-backed securities and sell them to investors.
Some lenders made commitments to customers several weeks ago to fund fixed-rate loans at rates well below 10%, but now cannot sell the loans at a profit in the secondary market because rates have risen so fast.
‘Tremendous Hits’
“There are a lot of small mortgage companies that are undercapitalized and are taking tremendous hits” to their profits, said Ira Cohen, senior vice president of ARCS Mortgage.
One lender, Plaza Savings & Loan in Santa Ana, sold assets to offset its losses, according to Jack French, the firm’s chairman. “I know several lenders who are hurting as much as we are,” French said in a telephone interview.
A small savings and loan firm that is less than two years old, Plaza Savings also moved to limit losses by raising rates on some pending mortgages, French said. Not surprisingly, the move did not play very well with borrowers.
“Frustrated is putting it mildly,” French said. “Some of them are madder than hell.”
On a more upbeat note, lending experts believe the rate rise should give a temporary boost to home sales, as buyers decide to close deals now rather than wait.
‘Good for Brokers, Sellers’
“People are easily persuaded to buy now,” said Gail B. Berge, a real estate broker in Riverside. “That’s good for brokers and sellers.”
Borrowers are also switching to adjustable-rate loans in droves, lenders say. Adjustable-rate loans, whose payments rise and fall according to various bellwether financial indexes, accounted for less than one-third of all home loans nationwide in March but experts now expect that figure to rise.
“In the past week, we have been inundated with (adjustable-rate loan) applications,” said Frances Vincent, a loan agent in Santa Monica for California Federal Savings & Loan.
Introductory rates on adjustable-rate loans have remained relatively stable in the last four weeks, largely hovering below 8%. Lenders are said to be keeping introductory rates low to make them attractive to buyers, knowing that they will be able to raise the rate to market levels in six months or a year.
Principal Attraction
The principal attraction of adjustable rate-loans to borrowers is they have lower initial mortgage payments and they are easier to qualify for. The initial payment on a $100,000 loan at an introductory rate of 7.5%, for example, is about $700 a month.
It was this kind of economics that convinced Rick Caporale, an engineering consultant in Long Beach, to switch to an adjustable-rate loan at 7.75% for a home he wanted to buy. The fixed-rate loan he had applied for last month had soared from 9.3% to 10.25% and he did not want to take the chance it would go any higher.
The increases also point up how international financial events have come to play a pivotal role in determining interest rates on home loans.
“We’ve had rapid changes before, but they were related to domestic events in the economy,” said Lyle Gramley, a former member of the Federal Reserve Board and now chief economist for the Mortgage Bankers Assn.
Volatile Fixed Rates
Fixed-rate loans are volatile because they are closely tied to rates on long-term government securities. When these rates change, the impact shows up rapidly in the fixed-rate home loan market.
In recent weeks, interest rates on long-term government bonds have risen significantly in the continuing--but as yet unfulfilled--expectation that the Federal Reserve Board will boost interest rates to discourage Japanese and other foreign investors from selling dollar-denominated securities.
Opinions about where rates go from here vary markedly. Optimists say rates should drop somewhat in the weeks and months ahead, while others say the rise reflects a cyclical upturn in interest rates.
“This is the typical beginning of the upward cycle” in mortgage rates, said Dave Park, head of the Park Place Realty brokerage in the San Fernando Valley. “You’ve got to be nuts to think they’re going back down again.”
Some forecasters remain more sanguine, believing that rates are higher than they should be. They believe that mortgage rates should be back in the neighborhood of 10% by this summer or fall.
“Unless you’re living in a small apartment with your in-laws and the dog,” said Robert K. Heady, publisher of Bank Rate Monitor in North Palm Beach, Fla., “the best thing to do is wait until this fall, when rates should be lower than they are now.”
