Headlines on an article in Wednesday's Business & Finance section about the Federal National Mortgage Association lowering its required yield on adjustable-rate mortgages incorrectly attributed the action to the Federal Housing Administration.
Interest rates on new adjustable-rate mortgages will drop significantly starting today because the Federal National Mortgage Association is lowering its required yield on these mortgages by 1 to 1 1/2 percentage points.
Chairman David O. Maxwell of Fannie Mae, as the association is known, announced at a breakfast meeting with reporters yesterday that Fannie Mae's rate on ARMs with adjustments every six months or every year will drop to 12.9 percent, and its rate on mortgages with 5-year adjustments is being lowered to 14.6 percent.
Those are the rates Fannie Mae pays to the lenders that originate the mortgages, but Maxwell said that lenders generally set the rate to new borrowers about the same level as the Fannie Mae rate. Before the change, the Fannie Mae rates were 13.8 percent on six-month adjustables, 14.5 percent on one-year adjustables, and 15.7 percent on 5-year adjustables.
Fannie Mae is a for-profit, federally chartered, shareholder-owned corporation that buys mortgages from local lenders, providing more money for new home loans to be made.
Maxwell said that rates will drop more dramatically on ARMs than on fixed-rate mortgages because they are short-term commitments that are adjusted periodically to reflect changes in other short-term rates. With the latest change in required yields, the Fannie Mae rates for the six-month adjustables will have declined by 5 percentage points from a level of 17.9 percent a year ago and for the 5-year adjustables by 2 1/2 percentage points [from] 17.1 percent.
Maxwell said the lower ARM rates will make homebuying affordable again for many consumers and will be good news for people wanting to refinance balloon mortgages, which are loans with the entire amount due after perhaps three or five years. But he also conceded that consumers continue to feel uneasy about committing themselves to adjustable rates, fearing rapid increases when rates are on the rise.
Maxwell says he feels that these fears are largely unfounded because he does not believe short-term rates will go back as high as they have been and because many ARMs have limits on the amount of increase for any one adjustment period.
Although he expects the drop in mortgage rates to stimulate more home sales, Maxwell predicted only a slow and modest improvement in housing starts into next year. There are large amounts of unsold inventory, and many builders have gone out of business during this housing depression, "and you can't just turn it on and off," he noted.
Housing starts will not go back to the 2 million annual rate of a few years ago any time in the 1980s, Maxwell predicted. And although prices are likely to rise somewhat as rates decline, they are unlikely to duplicate the great leaps of the past, largely because the speculative market for housing has been dampened, he said.
Maxwell became chairman of Fannie Mae last year, when it was experiencing large losses. Yesterday he said it will still be a while before Fannie Mae is in the black, but noted that the losses were cut from about $150 million in the last half of 1981 to about $86 million in the first half of 1982.
Fannie Mae now has a "completely new team running the show" and has changed the way it does business to make it more profitable, Maxwell said. One major change has been the greater variety of mortgages Fannie Mae will buy.
"We used to just have vanilla," Maxwell said, but in the past year Fannie Mae has bought about 80 different kinds of home loans, many of them negotiated on a case-by-case basis with lenders as new plans were developed.