Fixed Loans Back in Favor as Rates Ease : Mortgages: Adjustable loans lose some luster as interest rates slip below 8%, their lowest level since March, 1994.

After a yearlong rush to adjustable-rate mortgages, bargain-hunting borrowers are turning to fixed-rate home loans in response to easing interest rates, real estate experts say.

In the last three weeks, fixed-rate mortgages, which had gone above 9% in December, fell below 8% for the first time since March, 1994. The average rate in Southern California now stands at 7.5%, according to Mortgage News Co. in Irvine, which tracks local rates. The national rate is 7.51%, according to the Federal Home Loan Mortgage Corp.

“Last weekend, we got $72 million in fixed-rate applications,” said Mary Trigg, a spokeswoman for Home Savings of America. “That was five times what we took in the previous weekend in fixed-rate applications.”

The lower rates typically spur home sales, which have been off as much as 30% this year in parts of Southern California. But the sluggish local economy, hampered by a weak job market and a foreclosure rate still considered too high, is keeping a lid on sales, said Chris Taylor, an economist at Wells Fargo Bank in San Francisco.

“Once potential home buyers think rates are at a good level and are not going to go down too much more, they’ll be inclined to get into the market,” she said. “The lower rates should be some stimulus to the market.”

Rates inched up slightly this week after comments by Federal Reserve Board Chairman Alan Greenspan were taken by Wall Street as an indication that he may be in no hurry to lower interest rates.

Still, the daily fluctuations in the volatile mortgage market are masking a consumer trend that is starting to favor fixed-rate loans.

“Two weeks ago, about 65% of our applications were for adjustable-rate loans, but by late last week, it was running at about only 46%,” Trigg said.

At American Savings Bank in Irvine, a major advocate of ARM loans, the ratio fell from 99% adjustable loans in the first quarter to 80% last month, said Robert T. Barnum, American’s president. “Soon I expect that we’ll do 60% ARMs and 40% fixed-rate loans,” he said.

Consumers looking for fixed-rate mortgages should have more choices than they have had in many years. S&Ls; in California, where thrifts pioneered the adjustable-rate mortgage and pushed it for years as a way to stabilize their own financial condition, are starting to pursue fixed-rate loans far more aggressively.

“We have been ARM lenders, but we are telling people now that we are lenders of choice,” Trigg said about Home Savings, the nation’s largest thrift. “We are really going after fixed-rate loans, too.”

During the long boom in home-loan refinancings, which ended abruptly a year ago when rates started rising, thrifts took a beating as consumers fled the adjustable market and flocked to mortgage companies and banks offering low fixed rates.

Last year, as rising rates made adjustable loans more attractive, some banks and mortgage companies began offering ARMs.

“What I’m seeing now is how competitive all the financial institutions are on rates for all loans,” said Earl Peattie, president of Mortgage News. “We’ve seen a real strong move by S&Ls.; Many that weren’t on the cutting edge of rates now are making a commitment to do that.”

Countrywide Credit Industries in Pasadena, the nation’s largest provider of home loans last year, said the downward trend in long-term rates has been a welcome relief.

Countrywide’s mortgages for home purchases increased 20% in May over April and were at their highest level since April, 1994, spokeswoman Laura Snow said.

“What we’re seeing now is a lot of consumers who got adjustable-rate mortgages six or nine months ago and have seen the rates go up,” Snow said. “They’re looking to refinance into a fixed-rate loan.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

S&Ls; Gain Market Share

Adjustable-rate mortgages helped savings and loans gain market share during the first-quarter home sales slump. California’s top 10 first-quarter residential mortgage lenders in 1994 and 1995:

FIRST QUARTER, 1994

Amount Market Loans (in millions) share Bank of America 3,969 $717.5 5.2% Home Savings of America* 3,225 587.5 4.3 North American Mortgage Co. 3,374 508.3 3.7 Countrywide Funding 2,283 348.8 2.5 World Savings & Loan* 2,060 347.0 2.5 Directors Mortgage Loan 2,480 322.7 2.3 American Savings Bank* 1,649 259.0 1.9 Medallion Mortgage Co. 1,756 246.9 1.8 Wells Fargo Bank 1,461 246.2 1.8 America’s Wholesale Lender 1,272 243.3 1.8 Other institutional lenders: 65,243 9,950.0 72.2

FIRST QUARTER, 1995

Amount Market Loans (in millions) share American Savings Bank* 3,557 $699.0 6.7% World Savings & Loan* 3,529 620.6 5.9 Bank of America 2,957 527.5 5.0 Home Savings of America* 2,779 509.8 4.8 Great Western Bank* 2,203 348.3 3.3 North American Mortgage Co. 1,952 253.8 2.3 Coast Federal Bank* 1,144 228.1 2.2 California Federal Savings* 902 198.6 1.9 Countrywide Funding 1,499 194.2 1.9 Nationsbanc Mortgage Co. 803 176.9 1.7 Other institutional lenders 48,740 6,741.6 64.3

* Savings and loan

INTEREST RATE TREND

Southern California monthly average interest rates:

30-year fixed 1-year adjustable Month 1994 1995 1994 1995 Jan. 6.9% 9.0% 4.0% 7.2% Feb. 7.3 8.5 4.2 7.0 Mar. 8.1 8.3 4.7 6.6 April 8.3 8.2 5.4 6.4 May 8.4 7.6 6.0 6.1

Source: TRW REDI Property Data, Mortgage News; Researched by JANICE L. JONES / Los Angeles Times