Warning that some local lenders already have stopped taking mortgage applications, District of Columbia bankers and real estate executives yesterday predicted a severe shortage of mortgage funds unless the City Council extends, raises, or abolishes Washington's ceiling on mortgage interest rates.
The ceiling in the District is now 10 percent, but it will fall to 8 percent Aug. 1 unless the council acts.
Banking and real estate representatives supported a council bill to extend the term of the higher ceiling in hearings held by a City Council committee.
But savings and loan association representatives urged the council to go further by raising the limit above 10 percent or abolishing it.
Even a 10 percent ceiling will force many lenders to stop making mortgage loans in the district, warned the spokesmen for the S&Ls, which make most mortgage loans.
Savings institutions cannot make 10 percent mortgages because the Federal Home Loan Bank, from which they must borrow much of their money, charges more than that, said Orlando Darden, president of Community Federal Savings & Loan Association.
Darden said Community Federal recently stopped taking mortgage applications - the first time in four years that it has refused even to consider making new loans to home buyers.
Pushed by unprecedented demand for home loans and higher interest rates on other borrowings, mortgage interest rates have surged upward recently.
In Virginia, where there is no legal limit on interest charges, mortgage rates already have passed 10 percent at some S&Ls. In Maryland, which also has a 10 percent limit, and in Washington, lenders simply stop making mortgage loans when market rates reach the ceiling, the lenders said.
The District of Columbia's usuary laws have set an 8 percent limit on mortgage rates since the 1920s. In 1974, the City Council approved a two-year "emergency" increase in the ceiling to 10 percent. It was extended for another two years in 1976, but expires this August.
A bill to make the temporary 10 percent limit permanent is now before the council's committee on employment and economic development, headed by Wilhelmina Rolark (D-8).
Thomas Owen, president of Perpetual Federal Savings and Loan Association, said at the hearing yesterday that "the tenor of my remarks would have been substantially different" if he had testified three of four months ago.
"I would have called for a continuation of the 10 percent usury ceiling on home mortgages, recognizing that tampering with any interest rates in an election year is a difficult thing," Owen said.
But interest rates have risen sharply in the past 60 days, so now the 10 percent ceiling is below what lenders must charge to make a profit, he said.
Urging an increase in the interest ceiling to 11.5 or 12 percent, Owen added, "It is better to have funds available at a price, albeit a high price, than it is to have no mortgage credit available at any price because the rates are unrealistically low."
Owen and James Harris, president of Washington Federal Savings & Loan Association; explained that some mortgage money comes from savings deposits, but financial institutions must borrow in the secondary mortgage market to get enough funds for all the mortgages needed in Washington.
The Federal Home Loan Mortgage Corp. will not provide funds for mortgages carrying less than a 10 percent rate, Harris said. "You cannot expect financial institutions to consistently make mortgage loans in the District of Columbia when the usuary rate is less than the market rate."
Evidence of the shortage of mortgage money was reported yesterday by the Federal Home Loan Bank Board, which said deposits at savings and loan associations fell to $364 million in April, the lowest level since 1974.
Officials blamed the drop in new savings - from $2.59 billion in March - on competition from other investments which can offer higher yields.
In an effort to get more money for home mortgages, banks and savings and loans will be able to offer two higher-yielding savings plans starting today. About three-quarters of the local financial institutions say they will offer the higher-rate savings certificate will carry interest one-quarter point above the rate paid on six-month U.S. Treasury bills, which sold last week at 7.16 percent. It is available only in amounts of $100,000 or more.
A new eight-year certificate, available in $1,000 minimums, will pay 8 percent at savings and loans associations and 7.75 percent at banks.
S&L officials generally are skeptical that either new product will provide much additional mortgage money, they said at the convention of the Metropolita Metropolitan Savings and Loan League last weekend.
They fear the six-month certificates merely will draw funds from other accounts rather than bringing new money into the market. The eight-year, 8 percent certificate is derided as "crazy eights" by some thrift institution officials, who see two dangers.
On one hand, mortgage rates can not be expected to fall below 8 percent when lenders are locked into paying 8 percent for the money they borrow. On the other hand, if interest rates do trend downward, profits will be pinched because the S&Ls are stuck with paying 8 percent interest on savings for eight years.
Donald Menefee, president of Madison National Bank and of the D.C. Bankers Association, urged the council not to let the mortgage ceiling fall back to 8 percent, noting that raising the limit in 1974 made more housing available in the District. The number of properties sold per year has increased by 89 percent since the interest limit was raised, he said.
The U.S. Treasury recently paid 8.25 percent interest on 10-year borrowings, Menefee noted. If the D.C. ceiling returns to 8 percent, "You would be asking us to loan money to borrowers at rates below that paid by the federal government," he said.
Also urging continuation of the 10 percent limit was Richard Haase, chairman of the taxation committee of the Washington Board of Realtors.
Haase said "home loans in the District of Columbia will come to an immediate halt" if the ceiling falls to 8 percent. "Low and middle-income housing sales in particular would be adversely affected," he said.