Because of an editing error, the definition of real estate "points" was incorrectly stated in early editions of an article yesterday. A point equals 1 percent of the amount of the mortgage loan to purchase a house.
The retired military officer thought the sale of his Northern Virginia home was all set. He had a buyer, and a mortgage company promised to charge him only 3 1/2 discount points on the sale of his home under the Veterans Administration loan guarantee program -- about $2,600 in this case.
But on Thursday -- the day before the settlement was scheduled -- he received a call from his real estate agent. The mortgage company wanted to charge him 8 points. A compromise finally was reached at 6 1/2 points -- but that meant the seller still had to pay $2,200 more than what he had been promised.
"I feel terrible," he said, "I got stung for almost double what it should have been almost overnight. I had no idea it was going to be like this. The market's gone haywire, I understand."
His situation has been replayed many times over during recent weeks in the Washington area.
Mortgage bankers generally finance government-backed loans and sell them to other investors. When a lender agrees to provide a lower-interest loan, such as those backed by the VA or the Federal Home Administration, it usually charges the home seller points. (Each point is worth 1 percent of the mortgage loan.) The points help make the mortgage more valuable when the lending institution tries to sell it to another investor.
When interest rates rise rapidly, the lenders often have to charge additional points to make the low interest loan attractive enough for another investor to buy.
"Things are in an awful mess," said Wes Foster, president of the Long & Foster real estate company. "Lenders are not honoring their commitments, and it appears to be fairly widespread.
"We have told lenders that if they don't honor their commitments, we will no longer do business with them. . . . Quite a few settlements have been delayed."
Gordon Carey, an official with the Colquitt-Carruthers real estate company, said his firm had problems settling 27 cases last week. Several had to be delayed, he said, while others had to be taken to different lenders.
"We've always had problems in a changing market, but no one has experienced anything as bad as this," said one real estate agent. "Every settlement is like pulling teeth now."
Frank Green, president of the Mortgage Bankers Association of Metropolitan Washington, said mortgage companies across the nation are experiencing the problem.
"We've seen violent swings in the market beyond comparison with any other year," Green said. Some important bankers have had to change points from the standpoint of survival."
But Green added that the practice gives mortgage banking "a bad image," and suggested that persons with complaints write to the ethics committee of his association.
Part of the problem is that many mortgage companies -- and many housing experts -- expected interest rates to continue to decline through the summer and made loan commitments at the lower rates. But instead, interest rates have climbed steadily for several weeks.
Last week, the federal government raised its maximum rates for FHA and VA loans from 11.5 percent to 12 percent. But the lenders complain bitterly that the increase was too little, too late to help them.
Only a month ago, interest rates on conventional loans with a 20 percent down payment in the Washington area were averaging 12 percent. But a survey yesterday by Victor J. Peeke, of Interest Data Reports, showed rates averaging between 13 and 13 1/2 percent. Peeke said lenders quoted an average of about 8 points to the sellers wanting a VA or FHA loan covered.
"The problem is not that the lenders are dishonest," said one real estate company official. "They hire kids to go to brokers and peddle their loans, telling the brokers they can do the loan for only 3 points. Then they can't honor their commitments at settlement. That leaves our offices in the lurch . . . We've been cutting the heck out of our commissions (to keep costs down for sellers) We've been really ripping up commissions to keep things quiet."
Pat Evans, assistant vice president of First Mortgage Corp. in Columbia, Md., noted that many mortgage companies stand to lose a considerable amount of money in the current market.
"We've been adjusting points this week and last," Evans said. "We're trying to do the best we can for our realtors. It's a very emotional time, a heart-breaking situation. We're raising points where we can."
The uncertain market worries people like Richard Tearle. Tearle, who drove the six hours from New York to Washington each weekend for more than a month searching for a new home here for his family, finally signed a contract earlier this summer on a $102,000 home in Burke, Va., with a VA loan. He has Sept. 15 settlement deadline.
But the contract says the seller will pay no more than 5 points and Tearle said he has been told that unless the mortgage picture brightens the lender might have to charge 9 or 10 points and raise the interest rate Tearle was promised. All of that means he could lose his house.
"I anticipated trouble but not this much trouble," Tearle said. "I was pretty miserable at first but I'm adopting a relaxed attitude or else I couldn't concentrate at work and I'd be a bear at home on weekends. I'm resigned to the fact that things will go wrong."
Green, of the mortgage bankers association, noted that VA and FHA rates have changed seven times so far this year. "This is the most volatile year we've had," Green said. "We've never seen anything like it in history."
Leon Graybill, of Guardian Mortgage and Investment Corp., noted that his company's loan commitments state that if there is a change in interest rates, the loan commitment is null and void.
"Mortgage companies are not at fault," Graybill said. "Any mortgage company must protect its ability to do business."
Mortgage bankers said it is common for points to be renegotiated when interest rates go down. If interest rates go up they said, a lender usually will keep the points the same.
But this year, they said, has been unusual.