The fixed-rate, 30-year mortgage isn't dying in California: It is just about dead and buried.
In the last couple of months, several of the giant, state-chartered savings and loan associations that dominate California's mortgage market decided, quietly and independently, to stop offering long-term, fixed-rate mortgages, except to fulfill exsisting commitments.
Thrifts and banks across the country, their profits battered by wildly fluctuating interest rates, moved aggressively last year toward shorter-term mortgages -- ones with rates renegotiable every one to five years, of with rates indexed to money costs. But the official death knell for the 30-year, fixed-rate home loan was probably tolled when some of the nation's biggest S&Ls decided to end them as a matter of policy.
Last December, Home Savings & Loan Association, the nation's largest S&L and a unit of H. F. Ahmanson & Co., switched almost exclusively to variable-rate mortgages. the rate can be adjusted up to one-half of a percentage point a year, depending on the cost of funds to Home Savings. Great Western Savings & Loan Association, the second biggest S&L and a unit of Great Western Financial Corp., decided in January to write only fixed-rate mortgages due and payable in five years. Monthly payments, however, are calculated on a 30-year basis.
On Jan. 15, Home Federal Savings and Loan Association of San Diego adopted a single mortgage -- three years with a renegotiable rate. The long-term homeloan "is no longer a practical and viable instrument in today's inflationary environment," says Richard Christopher, a senior vice president.
The retreat from the traditional mortgage isn't total. Some S&Ls still offer long-term, fixed rate home loans under tiny minority-lending programs. Some may try to package fixed-rate mortgaes for sale to government agencies. And lots of S&Ls haven't yet officially decided to stop making these long-term loans.
But for practical purposes, says an official of the California League of Savings and Loans: "It is dead, whether the consumer know it yet or not."
Last year's roller-coaster interest rates did most of the damage. Banks and S&Ls were constantly having to adjust the rates they paid to attract savings. Rates rose and fell five percentage points to six percentage points within three months. At the same time, S&Ls were stuck with relatively fixed earnings from huge porfolios of long-term mortgages. As the cost of money skyrocketed, profits were squeezed.
The final blow was the near-demise of the secondary mortgage market, in which S&Ls used to sell off big packets of loans to raise cash for more lending. Now, traditional buyers such as insurance companies and other S&Ls want nothing to do with long-term loans.
"We don't know who in hell is going to buy fixed-rate, long-term mortgages," says Louis Anderson, a vice president at Imperial Savings & Loan Association, San Diego. "The purchasers are waking up. They don't want to lock up thier money for 30 years any more than we do.
Imperial, a subsidiary of Imperial Corp. of America, along with World Savings & Loan Association, a unit of Golden West Financial Corp. of Oakland, led the mmovement to exclusively short-term lending last fall when it decided to offer mortgages callable in three to five years. Among California S&Ls, "callable" or "rollover" mortgages such as these are becoming the norm. In San Diego, Point Loma Saivngs & Loan Association is even writing a few loans at the bank prime rate of about 20 percent, due in full in one year.
This practice worries state regulators and some thrift executives because unlike a federal or state authorized renegotiable-rate mortgage, there's no guarantee that the lender will refinance the home when the mortgage comes due. But California S&Ls have been avoiding renegotiable mortgages because their rates can only go up by one-half percentage point a year. Rollover mortgage rates, on the other hand, can rise without limit.
What happens if thousands of home buyers facing huge ballon payments in a fed years find that mortgage money is tight or real estate prices haven't appreciated much?
"The rollover mortgage bothers me," says Anthony Frank, chariman of Citizens Savings and Loan Association in San Francisco. "It puts the borrower in jeopardy."
Others point to Wisconsin, where banks have offered a form of rollover mortgage for 100 years, and thrifts now offer one-year to five-mortgages. Since the credit squeeze began, lenders there have held rate increases to an average of 1 1/2 to three percentage points. Richard Larson, president of West Bend Savings and Loan Association, West Bend, Wis., say he isn't aware of any recent evictions.