The Federal Home Loan Bank Board has raised the prospect that it approve adjustable rate mortgages for savings and loan associations without any ceiling on the amount they may be increased.
The FHLBB yesterday voted to request public comment on several issues related to adjustable rate mortgages -- mortgages on which rates go up or down with changes in interest rates -- including several new ones. The board had asked for comment on more limited issues in October.
Besides raising the issue of whether there should be a limitation placed on the rate by which monthly payments may be increased, the FHLBB also asked whether negative amortization -- allowing the amount of principal outstanding to increase -- should be alowed.
In doing so, the board that regulates S&Ls is following in the footsteps of the office of the Comptroller of the Currency which has also asked for comments on how a uniform adjustable rate mortgage for banks might be structured.
The Comptroller's office asked for comment on whether the cap on monthly payment increases should be set at 5 percentage points, a 50 percent increase over the original rate or left off entirely and also asked whether negative amortization should be allowed.
In the past two years as interest rates have fluctuated widely and deposits have been drained from thrift institutions by investors looking for higher rates, traditional mortgages with interest rates and montly payments locked in for as long as 30 years have become unattractive to lenders and less available for would-be borrowers.
Casting around for alternatives, the banking and savings and loan industry have come up with a couple of variationson adjustable rate mortgages. Banks had no limitations on what they might offer. The comptroller's proposal was aimed at producing a uniform type of mortgage.
Savings and loan associations may offer either variable rate mortgages or renegotiable rate mortgages. The variable rate version is a long term mortgage whose rate is adjusted at set intervals with the charges indexed to rise and fall with the average cost of funds to federally insured associations. rThe changes in interest rates cannot be more than half a percentage point a year with a maximum net increase of 2.5 percent over the life of the loan.
Renegotiable mortgages are a series of automatically renewable short-term loans secured by a long-term mortgages with interest rates bargained over at intervals. Rates could be changed no more than half a percentage point each time with a cap of 5 percent over the life of the mortgage