Economist Sees Stable Period for Mortgages
The five-month-long run-up in interest rates is near a temporary peak, and mortgage rates will likely stay within half a point of their current 11% level through the end of the year, according to one of the nation’s top real estate experts.
Robert Van Order, chief economist of the Federal Home Loan Mortgage Corp., believes a stable economy and modest inflation rate will keep mortgage rates in the 10 1/2% to 11 1/2% range for at least the next three months.
Wider swings will be avoided, barring unforeseen circumstances, such as another increase in the discount rate or renewed fear that inflation will heat up, Van Order said.
Little Effect Seen
Although the economist said rates are more likely to go up than down next year, an increase would have little effect on home sales because Americans’ incomes will continue rising, and more people buy real estate when inflation appears to be picking up. Total home sales in 1988 will nearly match the 4 million to 4.2 million sales expected this year, Van Order said.
Housing starts in 1988 will “roughly equal” the 1.6-million starts expected for this year, Van Order added. And that’s good news for the construction industry, which employs about 3 million Americans.
Van Order made his comments to about 70 reporters attending Freddie Mac’s annual media seminar, held Sept. 17-19 here at the Helmsley Hotel.
Freddie Mac is a key player in the so-called secondary mortgage market. The agency buys mortgage loans from lenders, pools them, and then sells securities backed by the loans to investors. This process gives lenders the cash they need to make new home loans.
Biweekly loans will be easier to find if Freddie Mac officials approve a plan currently under their consideration that calls for the agency to begin purchasing the loans from lenders.
Borrowers who take out biweekly loans make their payments every other week instead of once a month. Each payment is about half of what they would pay on a monthly basis. Since the biweekly borrowers make the equivalent of 13 monthly mortgage payments over the course of a year, they pay their loan off in about 18 years instead of 30, and save tens of thousands of dollars in interest charges.
Most lenders have refused to offer biweekly loans, in part because Freddie Mac and the Federal National Mortgage Assn. don’t currently buy them. But Freddie Mac President and Chief Executive Leland Brendsel said there’s “a 50-50 chance” his agency will approve a new biweekly purchase program within the next few months.
If the plan is approved, Freddie Mac could start buying the loans by 1989, Brendsel said. Hundreds of lenders across the nation would likely jump on the biweekly bandwagon soon after.
Legislation that could make it easier for struggling farmers to sell their property may fail merely because certain congressmen are angry that they won’t get credit for the move, one Washington insider, who requested anonymity, said.
A provision in HR 3030, drawn up by the House’s Agriculture Committee, would create an agency that would buy farm loans from lenders in an effort to encourage more banks and savings and loans to lend money to farm purchasers. Although the concept generally received widespread support, the insider said, House Banking Committee chairman John Dingell (D-Mich.) has introduced a motion to strike the provision “because he’s mad that the Agriculture Committee is treading on his turf.” House Banking Committee chairman Fernand J. St Germain (D-R.I.) is also rumored to be angry about the provision.
An aide to Dingell denies that the motion to strike the provision from HR 3030 is “the result of a turf war.” According to the aide, Dingell “just has some concerns about the provision, and wants more time to study the matter.” Hearings on the provision are slated for this week.
Ironically, the motion to kill the proposal came at the same time country singer Willie Nelson was holding the annual “Farm Aid” concert to raise money for financially troubled farmers. “That’s politics,” the insider said. “Stuff like this happens all the time in Washington.”
Any further increase in interest rates will continue pushing more new-home buyers toward adjustable-rate loans because ARMs carry lower initial rates and are easier to obtain, economist Van Order said. Adjustables had been out of vogue until late spring, as buyers took advantage of the lowest fixed rates of this decade.
The popularity of ARMs began to rebound in April, when fixed rates jumped about 1 1/2 points. Nationwide, about 57% of all loans closed by savings institutions in July carried an adjustable rate, compared to 38% last March, according to the latest report of the Federal Home Loan Bank Board.
ARMS are in even greater demand in California, largely because the $141,599 median price of a home in the state is about two-thirds higher than the national average. About 80% of the loans made by savings institutions in California last July were adjustable, compared to about 65% last March, according to the Federal Home Loan Bank of San Francisco.
Would-be home buyers aren’t the only ones who will suffer if interest rates rise, speakers at the seminar said. Current owners with adjustable-rate mortgages will see their monthly payments increase, and banks could see their foreclosure rate climb, said James E. Crum, Freddie Mac’s director of loan servicing.
Banks commonly refer to property they acquire through foreclosure proceedings as “REOs,” short for “real-estate owned.”
“It’s too soon to tell whether REOs are rising, because it usually takes three to five years to spot a trend,” Crum said. But, he added, interest-rate increases would likely make it tougher for struggling homeowners to sell their properties and bail out of their mortgage. Those fortunate enough to sell would probably get less than they expected because higher mortgage rates will depress prices.
Banks despise foreclosure proceedings nearly as much as their troubled borrowers, in part because it is bad public relations. Foreclosure is also a costly process; by the time Freddie Mac unloads a home in its portfolio, 10% of the sales price is eaten up by sales expenses and other costs, Crum said.
Apparently, the folks who write about how hard it is to buy a home nowadays speak from experience. No more than half of the 50 or so reporters present at one seminar raised their hands when a Freddie Mac official asked how many of the writers owned their own house. Nationwide, about 64% of all Americans own their own piece of terra firma.
Those same reporters had a chance to underwrite a loan in a novel workshop dreamed up by Helen Dalton and the rest of Freddie Mac’s media-relations department. The scribes had to shift through the myriad of documents would-be borrowers must file when they try to qualify for a loan, and then had to decide whether the fictitious buyers should get the money.
Most of the reporters approved the loan for the man and his wife, both of whom stated in their loan application that they were journalists. However, at least one writer rejected the deal. “I’m not making a loan to these two,” he said. “They’re both reporters, so their job security can’t be too good.”
AVERAGE MORTGAGE RATES
Rates offered by California lenders
Avg. Lowest Avg. Avg. Type rate rate fees pts. APR First mortgages Conforming 30-year, fixed 10.95% 10.75% $276 1.95 11.24 Jumbo 30-year, fixed 11.54 11.00 279 2.00 11.84 Conforming 15-year, fixed 10.64 10.25 273 2.00 11.06 Jumbo 15-year, fixed 11.07 10.63 278 2.00 11.50 Conforming 30-year, adjustable 8.12 7.25 246 2.15 8.31 Jumbo 30-year, adjustable 8.06 7.38 261 2.40 8.40 Second mortgages Conforming 15-year, fixed 11.20% 10.88% $233 3.89 11.98
Conforming loans are loans that do not exceed $153,100; jumbo loans are for more than that amount. APR is the total annual financing cost, expressed as a percentage. The APR for adjustable loans is based on an index designated by the lender, and assumes that the initial rate will not change. Average fees reflect one-time charges made by lenders, typically when the borrower first applies for the loan. Points are usually paid when the loan closes; one pointequals 1% of the total loan amount. Rates quoted as of Sept. 23.
Source: CompuFund Inc., Santa Ana
