The Federal Home Loan Bank Board yesterday voted to allow federal savings and loan associations to issue home mortgages in which the interest rate and monthly payment rise and fall as interest rates change in the financial markets. Current mortgages are not affected.
Home buyers who do not want monthly changes in their loan payments could, at the option of the lender, have the additional charges added to their mortgage principal. Another option would be to extend the term of the loan to cover any additional costs.
Although the bank board has removed previous restrictons, individual lenders are free to set their own limits on mortgage increases. The new authorization takes effect next Thursday.
The new adjustable-rate mortgage is expected to replace substantially the traditional fixed-interest-rate mortgage that has long been the homeowner's greatest hedge against inflation, especially if interest rates continue to rise.
The board action immediately was denounced by consumer groups as "outrageous" and "irresponsible," while the savings and loan industry hailed the move as "revolutionary and beneficial."
The new authorization comes at a time when volatile interest rates have caused savings and loans the worst financial crisis in their history.
S&L losses for the first half of year may top $1.25 billion, and the decision to permit entirely flexible mortgages is considered essential to restore the industry's profitability over the long term. Savings and loans provide more than half of the nation's mortgage money.
The National Savings and Loan League yesterday welcomed the adjustable mortgage loan as "the most revolutionary and beneficial change in mortgages since the 1930s. The new types of mortgages will clearly make more funds available for housing by savings and loans."
The U.S. League of Savings Associations said the new system would "provide relief for the beleaguered housing industry and signal a turning point for the nation's savings and loan business.
Ralph Nader's Public Interest Research Group called the change an "irresponsible" move that will "reduce the desirability and availability of home ownership."
Rep. Benjamin S. Rosenthal (D-N.Y.), chairman of the House commerce, consumer and monetary affairs subcommittee, declared, "I am very concerned that the bank board has not provided adequately for full disclosure of the risks involved."
Consumers Union termed the regulation "outrageous." A staffer said, "If interest rates suddenly skyrocket, consumers' payments could far exceed their means."
Banks are currently restricted from raising the interest rate on adjustable-rate mortgages more than 1 percentage point each six months. The only restriction on federally chartered savings and loans will be that the term of the mortgage may not exceed 40 years.
Otherwise, the interest rate, monthly payment, loan principal and/or maturity may rise or fall according to an index mutually agreed upon at the outset by borrower and lender. Examples of likely indexes include the bank board's cost-of-funds rate and three- or six-month Treasury bill rates.
If the index rises, the lender may increase the rate; if it declines, the lender must decrease the rate.
Each applicant must be given a full disclosure statement outlining the terms, and a 30-day notice must be given before any change is made. No prepayment penalty is assessed for paying off the loan before it is due.
Although virtually on restrictions are imposed by regulation, the bank board and the industry expect savings and loans to set as a marketing tool, their own limits on amount or frequency of increases.
In this way, potential borrowers can shop for the most favorable loan terms. John W. Stadtler, chairman of National Permanent Federal Savings & Loan Association, said yesterday that he expects terms to become competitive after an initial trial period.
While calling the new authorization a major step, newly appointed bank board chairman Richard T. Pratt insisted yesterday that traditional mortgages would continue to exist. He also predicted that the action would reduce housing speculation.