The federal government announced yesterday it would impose a 12 percent interest rate ceiling on 2 1/2 year savings certificates and raise the maximum rate on FHA-VA-insured mortgages to 13 percent. Both moves were described as necessary to increase the dwindling supply of mortgage funds.
Federal regulators acted to prevent interest rates on the popular certificates, which are pegged to rates of comparable Treasury securities, from rising to effective yields of over 14 percent. The action is effective Saturday.
As of that date, instead of paying 13 1/2 percent, which works out to 14.67 percent with compounding, thrift institutions will be permitted to pay only 12 percent, with an effective yield of 12.94 percent. The rate for commerical banks will be 11 3/4 percent, yielding 12.65 percent.
Federal regulators advised they would be "prepared to make whatever future adjustments in the ceiling rate that my be appropriate."
Financial institution had protested they couldn't pay the higher rates to savers at a time when borrowers were backing away from paying similar rates on mortgage loans, and when they still had low interest mortgages in their portfolios.
In January, new receipts in savings and loan associations totaled $1.1 billion, or just one quarter the amount deposited one year earlier. Balances in the new 2 1/2 year certificates grew to an estimated $3.2 billion in the first month in which they were offered. Meanwhile funds in regular passbook accounts and other types of certificates declined sharply, according to the Federal Home Loan Bank Board.
Mortgage loans in January fell to $3.8 billion, 40 percent under the volume of a year ago and 25 percent less than in December 1979. That was the smallest number of loans closed since late 1975.
Mutual savings banks suffered a $1.4 billion outflow of funds in January, the most since last October. New mortgages amounted to $141 million, down from $405 million in December.They sold $1 billion in 2 1/2 year certificates last month, but little of that represented new funds as most of the money was transferred from passbook accounts.
Federal Home Loan Bank Board Chairman Jay Janis said "The temporary ceiling was necessary because at higher rates of interest it would not be feasible for savings and loan associations and mutual savings banks to invest such funds in mortgages due to the lack of effective mortgage demand at those rates. With the temporary ceiling, which results in an effective yield of 12.94 percent (12.65 for commercial banks) with compounding, the funds can be profitably invested in mortgage loans."
Edwin Brooks, president of the U.S. League of Savings Associations, hailed the move adding, "With today's action and more like it, we can at least see a glimmer of hope that home mortgage rates would stop accelerating."
High interest rates have also caused housing starts to drop precipitously. They are now running at an annualized rate of 1.42 million. One economist predicted yesterday that an administration worried about housing would likely seek caps on other savings rates in the future.
Kenneth Thygerson, chief economist of the U.S. League, said, "This is another indication of the Federal Reserve's use of Regulation Q (interest rate) ceilings as a complement to monetary policies to slow inflation." The administration backs a phase-out of Regulation Q but with the provision financial regulators can impose rates in emergencies.
He said the 2 1/2-year certificate had been selected as an experiment because it is a slightly less volatile instrument than the six-month money market certificate. (This $10,000-minimum certificate is directly tied to the Treasury bill rate.) Thygerson said that a cap of six-month certificates would be "the next Logical step."
While he does not expect the limitation of the 2 1/2 year certificate will send depositors to invest in money market mutual funds paying higher rates, he conceded that might happen if six-month certificates were capped. Money market mutual funds, incidentally, had their biggest month in history in January, taking in $21 billion. They now have $53.1 billion in assests.
Effective today, the new interest rate ceiling on FHA-VA-insured loans will be 13 percent for both single- and multi-family dwellings, 15 1/2 percent for mobile homes, and 15 1/2 percent for property improvements.
The move follows by just three weeks a increase in the FHA-VA rate from 11 to 12 percent. In making the announcement, Moon Landreiu, Secretary of Housing and Urban Development, said, "with the prevailing mortgage market rates and the recent action of the Federal Reserve Board (raising the discount rate to 13 from 12 percent), we had no alternative but to raise our allowable rates."
FHA commissioner and assistant secretary for housing Laurence Simons said, "as the result of renewed and strong inflationary pressures, the stabilization we expected with the last increases just did not materialize. The action we are taking today is essential to increase the supply of mortgage money for middle income home buyers."
Landrieu added that the increase was necessary to bring some relief from the soaring number of points (one percent of the loan value) sellers are required by lenders to pay. The points, now as high as 15, represent the difference between the FHA-VA rate and what the lender would get on a conventional mortgage. Conventional loans have also followed the discount rate and are now 14 percent and more in some areas.