In an attempt to clarify the current alphabet soup of changeable interest rate mortgages available to consumers, federal banking officials yesterday agreed to hold hearings in an effort to cook up a uniform product satisfies borrowers, lenders and investors.
Jay Janis, chairman of the Federal Home Loan Bank Board, said he and John G. Heimann, comptroller of the currency, have agreed to hold the hearings during the first week in December.
Due to differences in present versions, profesionals and public alike are confused, and the secondary mortgage market is unwilling to buy unfixed rate loans because they are not standardized. Lenders need to be able to make loans with floating rates, and lenders need standarization to be able to sell these loans to investor.
Flexibility, or loans with floating rates, is the housing industry's answer to volatility of interest rates, the other side of the coin to floating rates on savings certificates. "We can't go back to [rate] stability," Janis said yesterday. "Gyrations will be the norm for the next few years as the nation pursues a monetarist policy. It may be the price we have to pay to deal with inflation."
As a prelude to a standard variable-rate mortgage that could be offered by all financial institutions, the bank board proposed some changes in the two types it has authorized, the varible-rate mortgate (VRM) and the renegotiable-rate mortgage. (RRM). The proposals would bring the VRM and RRM closer to the ARM (adjustable-rate mortgage) recently proposed by Heimann.
If adopted, the amendments would double the permissible interest rate increase on the VRM to 1 percentage point a year, or a maximum of 5 points over the life of the mortgage. Thus the interest rate on a VRM could be raised (or lowered) every six months. On an RRM, the rate could be changed every three, four of five years, depending on the length of the original contractual period, to a maximum of 5 points.
Several consumer safeguards were eliminated from the regulations and others added. Lenders would no longer have to give the borrower the option of obtaining a fixed-rate mortgage when offering a VRM, and the "worst-case scenario" -- a comparison of fixed-rate and VRM terms -- would be dropped. Borrowers now would have the right to extend the loan maturity by up to 10 years if the rate is increased. The time before rate adjustments would be lengthened.
While applauded by industry, the bank board's proposal was attacked by the Washington Public Interest Research Group. "The FHLBB's refusal to recognize future adverse effects on moderate income, less upwardly mobile borrowers and its failure to explore ways in which consumer safeguards could moderate such effects represents one of the most blatant examples of banking agency insensitivity to consumer, civil rights and neighborhood concerns," the group said.
In a related development, the Federal National Mortgage Association yesterday announced a program to refinance mortgages it owns at under market rates. The idea is presented as an alternative to so-called wrap-around mortgages, the practice of combining a low-interest existing mortgage with a higher-interest new mortgage. It is intended to deter buyers of existing houses from assuming old mortgages and thereby forcing Fanny Mae, which buys mortgages from banks and S&Ls, to carry them at a loss on their books.
Refinancing through Fannie Mae can be more advantageous to the home buyer than a wrap-around when the existing mortgage is small and the borrower is obliged to get a short-term, high-interest-rate second loan to make up the difference in the total amount financed. Fannie Mae will offer a new loan at its commitment rate (currently 14.469 percent) or at the Federal Home Loan Bank Board index (currently 12 percent), whichever is lower depending on whether rates are headed up or down. Current markets are about 14 percent.