Federal officials opened a nationwide series in the future of mortgage lending yesterday and immediately became enmeshed in a bitter controversy that pits the lender against the consumer over the issue of variable-rate loans.
The session, held by the comptroller of the currency and members of the Federal Home Loan Bank Board, will be repeated later this week in Chicago and Los Angeles. The purpose of the hearings is to solicit comment on proposed regulations allowing national banks and thrift institutions to offer housing loans with changing rates tied to inflation.
Experts have predicted these new mortgage instruments gradually may mean the end of the traditional long-term loan with fixed monthly payments, the average American's chief hedge against inflation.
Urban community groups from Boston, New York, Philadelphia and Baltimore objected to any government regulators making so profound a shift in a 50-year tradition without full congressional hearings. For blue-collar workers living in unfashionable neighborhoods, the prospect of continued wage increases and real estate appreciation is not assured. Therefore, the witnesses asserted, entering into a mortgage loan with changing payments is akin to playing Russian roulette. Consumer's Union also requested a stay until regulators can come up with sufficient data to show that these new mortgages will not result in massive fore-closures.
Faced with volatile interest rates, lenders, on the other hand, urged regulators -- in the spirit of deregulation -- to allow them maximum flexibility in offering the variable loans. Bank of America led the way in declaring that no limit other than market forces should be set on how much a mortgage is permitted to rise over its lifetime, as is the case in Canada. The Bank Board has proposed a limit of 5 percent, whereas the comptroller has not decided whether there should be a cap.
Realistically, however, the bankers conceded that unlimited increases would be difficult both politically and legally. So most, like Oakley Hunter, chairman of the Federal National Mortgage Association, went along with 5 percent.
As for the maximum amount the mortgage rate could be raised, the American Bankers Association and the National Savings and Loan League called for doubling it to 1 percent every six months due to the extreme volatility of interest rates.
The Mortgage Bankers Association advocated standardizing the new mortgage instruments to facilitate their sale on the secondary market, but the National Association of Mutual Savings Banks argued this was premature. Federal regulators still hope to resolve existing differences among the so-called adjustable, renegotiable and variable-rate mortgages they have proposed.
A possible compromise was put forth by John G. Medlin, president of Wachovia Bank and Trust Co. of Winston-Salem, N.C. For the past two months his bank has been offering a variable-rate mortgage whose monthly dollar payments do not change over the term of the loan. However, the interest rate is adjusted every 90 days to market conditions. As far as the homeowner is concerned, this means it takes longer to pay off the mortgage and may also mean a high down payment.
Leonard Shane, chairman of Mercury Savings and Loan of Huntington Beach, Calif., and a member of the executive committee of the U.S. League of Savings Associations, supported the Wachovia plan, declaring that the home buyer should have the option of constant payments and longer maturity.
Another compromise suggested by Jonathan Brown of the Washington Public Interest Research Group involves creating separate mortgage policies according to income groups. There would be variable-rate mortgages for those who can afford them. For those who cannot -- and no dollar levels were mentioned -- lenders would continue to offer fixed-rate mortgages with the aid of shallow government subsidies.