Mortgage Bankers Fear Boom in Adjustable-Rate Loans Could Boomerang on the Industry If Borrowers Go Bust
WASHINGTON -- The mortgage banking industry, much like savings and loan associations, embraced the adjustable-rate mortgage as the savior of home financing.
The adjustable mortgage would protect the lender from swings in interest rates and lure new homebuyers because the interest charges are slightly lower than on a comparable fixed-rate loan.
Initially, the plan worked as adjustable-rate mortgages helped fuel the housing recovery of 1982-83. But now, industry leaders fear the adjustable-rate loans could become an albatross.
With interest rates headed back up, mortgage banekrs fear that homebuyers who took advantage of low introductory rates (so-called teaser rates) may not be able to afford the higher house payment. That could leave mortgage banks and other home lenders with a rash of foreclosures on homes financed during the last couple of years.
"Those loans were written 4% to 5% below the current market. The underwriting was not done to reflect that increase," said Robert Spiller, chairman of the Boston Five Cents Savings Bank. Mr. Spiller said another one-quarter to two-percentage point increase in mortgage rates could confront some homeowners with payments they cannot afford. Buyers with Economic Trouble
"After one to three years, we are going to see some buyers with economic problems," Mr. Spiller added. "It could be 6 to 12 months before we see some of that."
Mr. Spiller made his remarks while appearing on a panel at the annual convention of the Mortgage Bankers Association last week. Problems with adjustable-rate mortgages, as well as federal budget deficits and their impact on interest rates, were of key concern to some 1,000 bankers attending the industry trade meeting.
Mortgage banking companies are deeply involved in real estate finance. They produce 84% of all Federal Housing Administration-Veterans Administration loans and service 30% of all residential loans nationwide, according to MCS Associates Management Consultants of Newport Beach, Calif. In 1982, mortgage bankers originated more than 25% of all mortgages.
Mortgage lenders, which include mortgage banks and savings associations, began offering adjustable-rate loans in the late 1970s. But it was not until about 1980 that they became a major home financing instrument, although lenders say homebuyers still prefer conventional fixed-rate loans, fearing the "payment shock" that would come with high interest rates.
"The American people still have a love affair with the fixed-rate mortgage," said Felix M. Beck, president of the association.
To make adjustable loans more attractive, lenders started including interest or payment caps, which limited how often and how much the mortgage can be adjusted. And interest rates on adjustable-rate mortgages are generally less than fixed-rate mortgages because there is less risk that lenders will be hurt if interest rates increase. …