Fixed-Rate Mortgage Rates to Leap in ‘88, Analysts Say

Interest rates on fixed-payment home loans, in a slide for several months, should hit bottom soon and begin climbing again later this year, most lenders and real estate economists believe.

Fixed-rate mortgages, a few of which are now under 10%, “are at or near their low for the year,” said John Tuccillo, chief economist for the National Assn. of Realtors, who thinks that rates will increase as much as 1 percentage point before the end of 1988.

J. Timothy Howard, chief economist for the Federal National Mortgage Assn., the quasi-government agency known as Fannie Mae, seconded Tuccillo, saying: “By the end of the year, I expect mortgage rates to be close to 11%, if not higher.”

Federal Reserve Chairman Alan Greenspan buttressed these beliefs when he hinted before a congressional committee Tuesday that the Fed, the nation’s central bank, may have to boost interest rates later this year to head off a new bout of inflation.

Some real estate experts think that mortgage rates will surge in April if there is a strong spring home-buying season. Strong home loan demand could boost fixed rates by two-thirds of a percentage point between now and June, according to Robert K. Heady, publisher of the Bank Rate Monitor in North Palm Beach, Fla.

In the meantime, though, U.S. home buyers are enjoying the lowest home mortgage rates in about a year. Most fixed rates are hovering around 10%, but the lowest ones have tumbled into single digits. Far West Savings & Loan in Newport Beach has undercut its major competitors in California with a 30-year fixed-rate loan of 9.98%--a bargain rate that has boosted loan business as much as 40% recently, bank officials said.

“People still prefer the fixed-rate loan,” said Cliff Piscatelli, a Far West executive vice president.

Six months ago, just before the Oct. 19 stock market crash, most fixed-rate home loans carried interest rates ranging from 11.5% to 12%. (There is a $113 difference in the monthly mortgage payment on a $100,000 loan at 11.5% versus one at 10%.)

“This is a window for consumers to go for a fixed-rate loan,” said Howard J. Levine, president of ARCS Mortgage in Canoga Park.

Adjustable-rate loans are losing their popularity in this rate environment, economists say. “Ten percent seems to be the threshold below which people will shift to a fixed-rate loan,” Howard, the Fannie Mae economist, said.

But some lenders have slashed the rates on their adjustable-rate mortgages as well. Security Pacific Bank in Los Angeles has sharply boosted its mortgage volume this month by cutting its introductory rate on an adjustable mortgage--good for the first few months of the loan--from 7.75% to 6.95%.

Other lenders are trying to blend the best of both worlds. Metropolitan Life Insurance now offers an adjustable-rate loan that does not adjust for 10 years. Lenders normally raise or lower mortgage payments on adjustable-rate home loans every six months. The adjustments are made according to changes in certain indexes, such as the one-year Treasury bill or the cost of money within a certain banking district.

Lenders say the latest drops in fixed-rate home loan interest rates have touched off a minor rush in refinancings by those who want to dump their present loans, including some who are trading in old fixed-rate loans that are well above today’s market rate.

“These are people who had good intentions of refinancing last year and never got around to it,” said Fred Rayor, a mortgage lender in Rolling Hills Estates. “They are the first ones out of the gate now.”

Others are dumping their adjustable-rate loans after suffering “payment shock” from the sharp rise in rates that occurred last year between April and October. Those rate jumps swelled monthly mortgage payments on adjustable-rate loans by hundreds of dollars in some cases.

Though refinancings have gained in popularity, few lenders expect a return to the boom days of 1986, when home loan refinancings, ignited by plunging interest rates, became a mainstay of the nation’s mortgage-finance industry. Total home-loan financings ballooned to $450 billion in 1986, but should only reach $320 billion this year, lenders say.

Most mortgage loans that have fixed rates are grouped into pools as mortgage-backed bonds that are sold to investors in the secondary market. And it is the return demanded by investors on these mortgage securities that now dictates the loan rate for home buyers and makes rates so volatile in times of financial turmoil.

The volatility is not always bad: The October market crash forced many investors out of stocks and into the bond market, which includes mortgage-backed securities. The increased demand sent bond values up and interest rates down.

But last April, bond prices plunged and interest rates soared in the expectation that the Federal Reserve would boost rates to keep foreign investors from dumping dollar-denominated securities. At the time, the U.S. dollar was plunging in value against the Japanese yen.

That sudden movement savaged lenders who made loans at one rate, then found the loan suddenly unprofitable after fixed-rate mortgages soared as much as 2 percentage points in several weeks’ time.

“The lenders either walked away from their commitments and risked getting sued (by the borrower) or they honored their commitments and lost a lot of money,” said economist Tuccillo. “They were damned either way.”