Washington area lenders expect to begin offering renegotiated-rate mortgages this summer, if not sooner.
This week the Federal Home Loan Bank Board authorized federally chartered savings and loan associations across the country to issue this new type of homeowner loan whose interest rate can be raised or lowered every few years according to market conditions.
A spot check yesterday of eight S&Ls revealed that six have decided to offer renegotiated-rate mortgages (RRMs), while the other two haven't decided. Five of the six said they will continue to offer conventional fixed-rate mortgages as well.
Under the term of an RRM, the borrower gets a mortgage at current interest rates, amortized over 30 years. Monthly payments remain constant for the first three to five years; lender and borrower negotiate how long the initial period will last. At the end of that time, the rate is allowed to go up -- or down -- as much as one-half percentage point a year. Thus, on a three-year rollover, the maximum change allowed is 1.5 percentage points.
During the 30-year life of the mortgage, the maximum amount the interest rate can rise or decline is 5 percentage points. For example, if a mortgage were issued this month at 16 percent with a three-year rollover, and interest rates continued to rise, the highest rate that could be charged would be 21 percent, starting in 1992. If interest rates were to fall, the rate could be down to as little as 11 percent in the 13th year. The changes would be based on a national index.
So long as the homeowner has made mortgage payments, the lender is obliged to renew the loan at no charge every three to five years. Because there is no penalty for early loan repayment after the first period, the homeowner is free to look for a better rate elsewhere, although settlement costs must be paid if another lender is chosen.
Were interest rates to drop dramatically -- say 5 percentage points in the next three years -- it might benefit a borrower to refinance rather than roll over the existing loan. Economists estimate mortgage rates will average between 10 percent and 12 percent by the end of the decade. This year's average is expected to be 14 percent, according to Townsend-Greenspan & Co.
Critics of the RRM -- and surveys show little popular acceptance -- content it will spell the end of the fixed rate mortgage. The bank board added some consumers safeguards to its original proposal, but refused to guarantee loan applicants the right to choose between RRMs and conventional mortgages because S&Ls feared they couldn't sell RRMs if the choice were offered.
Bank board Chairman Jay Janis expressed confidence that marketplace competition will preserve the fixed-rate mortgage, but Rep. Benjamin Rosenthal (D.-N.Y.) and Ralph Nader doubt this. Among Washington S&Ls surveyed, only Jefferson Federal said it would discontinue the fixed-rate loan. The others said they intend to offer it, though some seemed to believe it cold be phased out. Only Washington Federal said it would offer a one-quarter-percentage-point discount off the going rate on RRMs as an incentive to borrowers.
Thrift executives appeared divided on the effect of the renegotiated-rate mortgage on the Washington market, where the prevailing interest rate is 16.5 percent and where 60 percent of the lenders have stopped making loans.
Thomas Owen, chairman of Perpetual, exclaimed, "It's the best thing that could have happened at this time from the consumer's viewpoint; it will stimulate demand. It won't return us to the boom times of the spring of 1979, but it will be of tremendous use to builders now."
Edgar F. Myers, senior vice president of Jefferson Federal, said his association plans to begin offering RRMs in midsummer in anticipation of the secondary market buying them in 1981.
James Harris, president of Washington Federal, said "I'd certainly want a rollover if I were buying now."
T. William Blumenauer, president of Columbia Federal, declared "people will feel a little more comfortable with (an RRM) than with a mortgage you have to refinance." But he added, "No (loan) at 17 1/2 percent (Columbia's current rate) is going to increase demand, but in the long run everyone will benefit."
John Raymond, chairman of Home Federal, was more pessimistic. "The RRM won't have any effect on making money available. It won't increase demand. That depends on whether customers think rates are going up or down. If I could read their minds, I'd be rich."