Perpetual Federal Savings & Loan, the largest mortgage lender in the Washington area, raised its home mortgage rate yesterday to 17 percent in a deliberate effort to discourage loan applications.
Perpetual's new rate -- the latest in a series of increases, each a record -- pushes home mortgage costs here to a level so high that only a small percentage of potential home buyers can afford to pay them.
At 17 percent interest, a $100,000 mortgage would require monthly payments of $1,426. At 14 percent, until recently one of the prevailing interest rates, the monthly payment would be $1,185, a difference of $241 a month.
The monthly payments are derived from standardized tables used by most mortgage lenders. The usual formula for amortizing mortgage loans defers payment of interest in the early years of the loan. Thus, in the first year the borrower does not pay the full amount of interest owed. But the monthly mortgage payments include amounts for taxes and insurance.
Only a family earning at least $68,400 a year could qualify for a $100,000 mortgage at the 17 percent rate under the credit guidelines used by most lenders.
Lenders say $100,000 mortgages are commonplace in the District of Columbia. Even a $50,000 mortgage would require monthly payments of more than $700 and an annual income for almost $35,000 a year to qualify.
"We don't expect to do much business at those rates," said Perpetual Chairman Thomas Owen. "What we've done is to give ourselves time to look at the market."
Interest rates are jumping so erratically that lenders say they can't tell from one day to the next how much interest they should charge for a loan.
As a result many mortgage lenders are closing their loan windows.
Pushing interest rates high enough to discourage people from borrowing is a goal of the Carter administration and the Federal Reserve Board in their effort to curb inflation. The tactic is working with a vengeance in the home mortgage field.
"It's a complete disaster," said Martin Wiegand, chairman of Metropolis Federal Savings and Loan and president of the Metropolitan Savings and Loan League.
Metropolis has stopped making mortgage loans, Wiegand said. He predicted that "the whole system is going to come to a screeching halt within a very short time."
Owen said Perpetual's 17 percent rate is "only temporary," but how temporary will depend on how soon other interest rates retreat from their record levels.
"There's nothing on the horizon to lead us to believe it has peaked," Owen said.
Because interest rates are changing every day, no accurate survey of the rates charged by the more than 100 mortgage lenders in this area is available. Estimates in the industry are that most lenders are quoting rates of 14 to 15 percent on conventional mortgages.
The rates will have to go higher if banks, savings and loans and mortgage brokers are to continue to make loans, because the interest the lenders must pay to get money is still going up.
On Monday, major banks raised their prime lending rates to 17 1/4 percent in response to government monetary policy. That's the rate they charge their most credit-worthy customers.
On Tuesday, the Federal Home Loan Mortgage Corp -- the government-financed agency that provides mortgage money to lenders -- raised the rate it charges for mortgage money to 15.4 percent. Private lenders must charge at least that much just to break even on a loan.
Federal officials yesterday authorized savings and loan associations to pay a record 14.8 percent interest on six-month certificates of deposit. Lenders say they have to charge at least a point or a point and a half more for loans than they pay for savings.
That would mean mortgages based on 14.8 percent savings would carry about a 16 percent interest rate.
Even if home buyers are willing and able to pay that rate, they may not be able to borrow money in the District of Columbia after this month, savings and loan executives said yesterday.
The District has a 15 percent usury ceiling on home mortgage rates. That ceiling -- and all other state usuary limits on mortgages -- has been temporarily raised by Congress.
But the three-month congressional moratorium runs out on April 1, unless Congress extends it.
The choice before Congress will be to cut off mortgages entirely or make them available at prices few consumers can pay.
Consider the impact of the soaring mortgage rates on a prosperous two-income family with an annual ncome of $50,000 -- typical home buyers in the Washington area.
When mortgage interest rates were 10 percent, the $50,000-a-year family could easily qualify for a $100,000 mortgage. At 14 percent, however, most lenders would give the same family only $75,000 to buy a house. At 17 percent, the maximum mortgage the $50,000-a-year family would qualify for would be $62,000.
Those figures are based on the lending guidelines now used by most banks and savings and loans. Under the guidelines total house payments -- principal, interest, taxes and insurance -- should be no more than 25 percent of gross monthly income.
At 10 percent, lenders figured a family earning $42,000 a year could afford the $878-a-month payments on a $100,000 mortgage. At 14 percent the payment jumps to $1,185 a month and the qualifying income to $56,800. At 17 percent, the payment tops $1,426 a month and the loan window is closed to anyone earning less than $68,400 a year.
The $100,000 mortgage is more than most people have, but was chosen to make comparisons easy. To find the payment on a $56,000 mortgage loan multiply the monthly amount by .56 on your pocket calculator.
On government-insured loans through the Federal Housing Authority and Veterans Administration, the maximum rate was raised last week to a record 13 percent, but lenders are still reluctant to make such loans.
In the Washington area, lenders are demanding that home sellers pay nine "points" to get an FHA or VA loan for their buyer. One "point" is one percent of the mortgage loan amount, so nine points amount to a 9 percent discount on the selling price of the house. In many cases, owners seeking to sell a house under FHA or VA simply jack up the price of the house to account for the points they must pay.