The interest rate on FHA- and VA-insured home mortgages will be raised to 12 percent today, the Department of Housing and Urban Development said yesterday. The announcement touched off fears of further damage to the already faltering housing recovery.
The rate was cut only a month ago to 11 1/2 percent, the lowest level in nearly three years. The new rate of 12 percent is for 30-year, level-payment loans, and the rate for graduated-payment loans is being raised from 11 3/4 percent to 12 1/4 percent.
The HUD announcement said the hike reflects events in the mortgage market, where interest rates have been creeping up in the past few weeks.
Both FHA Commissioner Philip Abrams and a spokesman for the nation's mortgage bankers attributed the increases--which have pushed rates on conventional loans to 13 or 13 1/4 percent--to investors' fears that the federal budget deficit will continue to grow, eating up money available to borrowers.
The rate increase " stinks, that's what it does," said Michael Sumicrast, chief economist for the National Association of Home Builders. "We desperately need stability in the financial markets. We cannot have these ups and downs in the mortgage market. It upsets people; it upsets buyers."
Housing sales have slowed in recent weeks, and "it doesn't take very long to really upset the whole" housing recovery, Sumicrast said.
Sales of new one-family houses dropped to a seasonally adjusted annual rate of 573,000 in April, down from a peak of 611,000 in January and from the March rate of 597,000, according to the Census Bureau and HUD.
A spokesman for the National Association of Realtors called the FHA-VA increase "very disappointing."
"Frankly it scares us, and I guess it ought to scare of lot of the general public," said the spokesman, Bill Atkinson. "What we are seeing . . . is the reaction of financial markets to the federal deficit. Congress and the administration are not making any headway on bringing deficits down."
Interest rates on conventional loans are dangerously near the 14 percent threshold "above which mortgage demand gets choked off fairly quickly," said Mark J. Riedy, executive vice president of the Mortgage Bankers Association.
Before today's increase, closings on home sales already "were falling off, and applications for loans had started to fall off," he said.
Many industry leaders say potential buyers are kept away by the high number of discount points being charged before today's rate increase.
Lenders want to sell the loans they make to investors in the secondary mortgage market, and they must produce a yield competitive with other types of investments to make these loans saleable. To produce the yield, lenders must give investors a discount. Then lenders try to get their money back by charging points to either the home buyers or sellers. A point equals one percent of the mortgage amount. Riedy said today's rate hike "probably knocked out at least 3 points in FHA and VA mortgages."