Lenders Scramble to Keep Housing Comeback Alive : Real estate: Rising interest rates threaten a Southland market showing signs of rebounding after four bad years.
Lenders are scrambling to keep the recent sharp rise in interest rates on fixed mortgages from scuttling a promising spring home-buying season in Southern California.
Many financial institutions have begun aggressively marketing loans designed to keep their borrowers’ initial monthly payments to a minimum, trying to take the sting out of a nearly one percentage point rise in mortgage rates in recent weeks that has added more than $100 a month to the cost of a typical $150,000 loan.
Real estate agents, meantime, are busy soothing the jangled nerves of home shoppers while they also struggle to complete deals that were reached before mortgage rates took their first big jump last month.
“Interest rates haven’t risen enough to pull the plug on the market’s comeback, but we want to make sure that (the recent increase) doesn’t even let any water out of the tub,” said Ann Carlton Bose, president of the Los Angeles chapter of the California Assn. of Mortgage Brokers and owner of Estate Funding Inc. in Woodland Hills.
Rates on fixed, 30-year loans hit a record 25-year low of 6.83% last October, according to the Federal Home Loan Mortgage Corp. After slowly drifting upward, they jumped sharply when the Federal Reserve Board raised the federal funds rate in early February and then surged again when the Fed boosted the rate a second time last week.
Rates now average about 8.04%, meaning that the monthly cost of a new, $150,000 loan is about $102 higher than it was just 10 weeks ago and $125 higher than it was last fall. More upward pressure was put on mortgage rates Tuesday, when the yield on 30-year Treasury bonds rose to 7.06% from 7.01%.
Ironically, the rate hikes have come just as Southern California’s housing market has been showing solid sales gains after spending most of the past four years flat on its back.
The Commerce Department said Tuesday that new home sales in the West--where California accounts for about half of all sales activity--surged a surprising 28% in February from January, compared to a modest 2% increase nationwide. The California Assn. of Realtors reported last week that statewide home resales rose 22% from a year ago.
Few real estate experts say the rate run-up will torpedo what so far promises to be the best spring home-buying season since the boom days of the late 1980s. However, some consumers say the rate increases are forcing them to rethink their home-buying plans.
When Wendy Veltroz started looking for a Riverside County home in the $115,000 range two months ago, a banker told her that a 7% loan for about $105,000 would cost her $700 a month. But with rates now at 8%, she’s been told that she will have to pay nearly $775.
“Seventy-five bucks might not seem like a lot of money to some people, but it’s a whole lot of money to me,” said Veltroz, a single mother who earns about $25,000 a year as a data entry clerk for a medical supplies company. “I’m not going to quit looking for a house, but I might have to look for one that’s a little cheaper.”
Keenly aware that the rate hikes have been especially hard on buyers on tight monthly budgets, many lenders have launched aggressive marketing campaigns, encouraging borrowers to choose adjustable-rate mortgages (ARMs) with rates that start out more than two percentage points lower than the rates charged on fixed-rate loans. The lower initial rate can trim hundreds of dollars off a homeowner’s initial monthly payments.
“When fixed rates were down in the 6% range, nobody wanted to talk much about ARMS,” said Bob Barnum, president of American Savings Bank in Irvine. “Now fixed rates are close to 8%, but ARMs still start around 4%, and a lot of people are choosing an ARM so they can borrow more money and buy a much nicer house than they could with a fixed-rate loan.”
With interest rates rising and the rush to refinance largely over, other lenders are trying to boost their mortgage business by offering more loan programs that require small down payments.
These so-called low-down loans were once marketed almost exclusively to cash-strapped first-time buyers. But with home prices off more than 20% from their 1990 peak, their appeal has been broadened to include existing homeowners who want to buy a new house but won’t have much cash left over when their old one is sold and their current loan is paid off.
“The downturn in values has created a whole new group of customers for our low-down-payment plans,” said Bob Garman of Riverside-based Directors Mortgage Loan Corp., which has added three new programs that require down payments of 5% or less over the past two months and plans on adding two more soon.
