The FHA-VA interest rate ceiling for home mortgages will be raised from 11-1/2 to 12 percent -- the highest ever -- effective Monday.
Actions taken concurrently yesterday by the Department of Housing and Urban Development and the Veterans Administration recognized the current high level of conventional mortgage rates, now ranging between 12-3/4 and 13-1/2 across the nation.
The higher FHA-VA rate will cost the purchaser of a house with a $50,000 mortgage an additional $19 a month. Generally, mortgage interest rates have increased more than 2 percentage points in the past year.
While purchasers using FHA and VA financing will pay 1/2 percent more in interest as the result of the higher ceiling, builders and sellers soon will probably pay 2 or 3 fewer "discount points" for the privilege of obtaining FHA or VA financing for purchasers, who are prohibited from paying more than one point.
A discount point is computed as 1 percent of the total mortgage amount and it is charged up front to buyers and sellers as a means of increasing yield on long-term mortgage loans at a lower annual rate than the actual market.
Recently, sellers using FHA or VA mortgage financing for their buyers have been paying 9 or 10 discount points. On a $50,000 mortgage, a seller's cost for the loan, when points were 10, was $5,000. When sellers have to pay heavy discount points, they traditionally raise the price of the house being sold to absorb at least some of the added cost of selling.
In announcing the rate ceiling increase, HUD secretary Moon Landrieu said he recognized the discount point hardship to sellers and also wanted to make the cost of government-backed mortgages closer to the prevailing level of the private market. The higher rate ceiling also is expected to attract more funds to the mortgage market.
Mark J. Riedy, executive vice president of the Mortgage Bankers Association which had urged HUD and VA to raise the ceiling to 12-1/2 percent to meet private market levels and reduce discount points, said the more costly FHA and VA mortgages should improve market conditions.
A spokesman for the National Association of Home Builders expressed distress at the higher rate but also termed it as "apparently inevitable." NAHB chief economist Michael Sumichrast pointed out that the annual rate of the sales of new houses fell to 559,000 in December, 31 percent less than the selling rate in December 1978.
Mortgage interest rates have increased sharply since October 1976, when the FHA-VA ceiling was 8 percent. The ceiling was raised several times in 1977 and went to 9 percent in May 1978. By April 1979, the ceiling was 10 percent.
Concurrently with the raise to 12 percent for long-term home mortgage loans, the ceiling for federally regulated multi-family housing loans will go to 12 percent. On Monday the top for mobile home loans will be 14-1/2 percent and 14 percent for mobile homes on their own lots. The FHA-VA maximum for home improvement loans will be 14 percent.