Fixed Rates for Home Loans in Big Comeback

The fixed-rate mortgage loan, out of favor for several years with both buyers and lenders, is undergoing a dramatic resurgence in popularity nationwide as interest rates have fallen to affordable levels, lending figures show.

Long-term home loans with fixed rates now account for approximately half the nation’s mortgages, up from about a third last summer. The surge has been particularly pronounced in California, where fixed-rate loans accounted for nearly two-thirds of the mortgages made in March, according to the Federal Home Loan Bank of San Francisco.

Stable Payments

Lenders believe the trend will continue, and perhaps even accelerate, as long as fixed mortgage rates continue their slide and once again become affordable for many buyers. The average fixed-rate for conventional mortgages fell to 13.1% in early May from 13.3% in early April, according to the Federal Home Loan Mortgage Corp. Rates peaked last summer at close to 15%.

The primary appeal of these loans, buyers and lenders say, is the security of stable monthly mortgage payments--unlike adjustable-rate loans whose payments are usually adjusted every six or 12 months depending on interest-rate swings.

“Most people still prefer fixed-rate mortgages,� says Mark J. Riedy, economist and president of the Federal National Mortgage Assn., a quasi-government agency known as Fannie Mae which buys mortgages from commercial lenders in the secondary market. “The certainty is worth a whole lot to them.�

If rates continue their fall, many buyers may abandon their present adjustable-rate mortgages in favor of a fixed-rate loan, says Dudley Herndon, president of the Deseret Pacific Mortgage in Encino.

“You are going to see a mass exodus away from adjustable rate mortgages if fixed rates go below 12%,� he predicts.

Adjustable-rate lending surged in 1983 and the first half of 1984 because they were what most consumers could afford. In many cases, the initial rate on the adjustables was several percentage points below the rate on a fixed-rate loan. Today, those initial rates are running between 10% and 11% at most California banks and S&Ls.;

According to figures from the Federal Home Loan Bank Board, which regulates 3,200 of the nation’s savings associations, adjustable-rate mortgage lending peaked at 68% of new home loans last August. Lenders included savings and loan associations, savings banks, commercial banks and mortgage banks.

Since then, the adjustables have skidded steadily, hitting a low of 46% in February before rising slightly to 49% in March, the latest month for which figures are available. In California, meanwhile, adjustables peaked at 78% in August, then plunged to 35% in March.

While consumers are clearly enjoying the new option available to them, lenders are sharply divided over the development.

Some in the savings and loan industry, which makes most of the nation’s mortgage loans, fret that lenders once again are sowing the seeds of their own demise. By making so many fixed-rate loans, they are making themselves vulnerable to a sustained upward swing in interest rates. If that happens, they will find themselves paying more for their funds than they can collect from their loans. That’s what happened in 1981 and 1982 when high interest rates forced about 1,000 savings associations out of business.

“What’s going on now reminds me of a few years ago when lenders were saying what a good deal the 10% fixed-rate mortgage was,� comments Dennis Jacobe, research director for the Chicago-based U.S. League of Savings Institutions, an industry trade group.

The increase also concerns government banking regulators, who have put heavy pressure on lenders to make variable rate mortgages. “We would clearly prefer that this not occur,� Eric Hemel, chief economist for the bank board, said of the trend back to fixed mortgages.

The changing preferences have also sparked widespread use of a fixed-rate mortgage that pays off in 15 years, or half the normal time. So fast has this business grown in recent months that the Federal National Mortgage Assn. (Fannie Mae) says 15-year, fixed-rate loans now account for about 15% of the loans it buys from banks and S&Ls;, up from almost nothing a year ago.

“Many second- and third-time home buyers . . . prefer mortgages with 15-year terms,� Fannie Mae’s Riedy noted in a recent report. “They may be thinking of their purchase as the last home they will buy, and want to own the house sooner, free and clear.�

Riedy added in an interview that he thinks it’s an excellent time to consider a fixed-rate mortgage because the rate should drop to 12% by mid-year.

California’s extraordinary preference for fixed-rate mortgages has some lenders and regulators groping for explanations, because adjustables were introduced earlier and have been promoted more heavily here than in any other state.

Some of the state’s largest and most influential S&Ls--such; as California Federal Savings and Great Western Savings--are so opposed to fixed-rate mortgages that they don’t even offer them.

Joseph Humphrey, vice president and chief economist of the Federal Home Loan Bank of San Francisco, suggests there is pent-up demand in California for fixed-rate loans. That’s because high housing costs made qualifying for such a loan even more difficult in recent years.

Many lenders say they like fixed-rate loans because they’re more profitable, simpler to administer and easier to sell to investors in the secondary market.

“The public wants this product and it has been very costly for institutions which don’t make them,� says Elliot Knutson, president of Washington Federal Savings & Loan Assn. in Seattle.

Even hard-core adjustable-rate proponents concede that fixed-rate loans are more profitable in the short run. At Santa Monica-based First Federal Savings Bank of California, for example, low introductory rates on adjustable-rate loans reduced profits by about 30% in 1984, says William Mortensen, the S&L;’s chief executive.

Yet it’s precisely the allure of short-term gains that worry savings executives like Mortensen and others, who believe today’s 13%, fixed-rate mortgage could be tomorrow’s bucket of trouble.

“Marketing fixed-rate loans is what got the industry into trouble,� said Larry Webster, a lending official at Republic Federal Savings & Loan Assn. in Altadena. “We have not forgotten that.�

Further, some lenders point out, homeowners holding adjustable-rate mortgages are enjoying considerable benefits from declining interest rates. Thousands are seeing steep drops in their mortgage payments--some in excess of $100 a month--because underlying interest rates have fallen so much in recent months.

Nevertheless, the trend back to fixed-rate mortgages is understandable, says Jacobe, the U.S. League’s research director.

“I’m surprised it hasn’t happened faster,� he admitted. “It’s the easier thing to do. What I’m afraid of is a repeat of 1981 and 1982. But when you’re on the front line with customers, it’s easy to forget about history.�