The Comptroller of the Currency this week authorized national banks to issue adjustable-rate mortgages (ARM) on which interest rates can be increased as much 2 percentage points annually. Under the plan, which is to go into effect next week, there can be no limit to the amount rates can be increased over the life of the mortgages.
The American Bankers Association called ARM "just what the doctor ordered." Because of wild swings of rates charged in the market-place, few banks have been willing recently to make long-term, fixed-interest-rate mortgages. Industry and federal banking officials believe it will free up mortgage money and allow more people to buy homes.
Spokesman for local banks were more restrained in their comments, however, and several said that they would have to wait and see the details of the plan before making a firm judgment.
Jerry Griffin of Riggs National Bank said that while ARMs are an "interesting" idea, he has mixed emotions. He said their effect would depend on when and how banks could apply them specifically under the regulations. One possible drawback he cited was the need for more frequent review of mortgages, which could add to the burden on personnel.
Consumer groups immediately denounced the comptroller's action, saying adjustable-rate mortgages could cause "extreme budget hardship, and default could resale." Home buyers with modest incomes could lose thier homes, the consumer groups fear.
The terms are twice as liberal as those proposed; last fall when the comptroller asked for comments on maximum semi-annual increases of one-half percentage point. For competitive reasons, federal savings and loan associations are expected to ask the Federal Home Loan Bank Board to allow them to match the banks' terms on the new changeable rate instrument it has proposed.
Changes in ARM interest rates must correspond to one of three national indexes: six-month and three-year Treasury rates and the bank board series of long-term contract mortgage rates for existing homes. Increases are up to the issuing bank, but decreases are mandatory.
The rate may not be changed more than once every six months. No repayment penalties may be charged after the first scheduled date for notification of rate adjustment. However, in some cases when the rate increases, the homeowner may be allowed to pay less than the full increase. This negative amortization -- which occurs when the monthly payment is not enough to cover the interest and therefore the principal increases -- is limited, however, to 10 percent of the principal outstanding at the start.
The new regulations override state laws prohibiting or limiting adjustable rate residential loans. Banks are required to disclose to prospective customers how a payment schedule for a similar loan would be affected by changes in the index.
Comptroller John G. Heimann said the ARM was intended to increase the supply of funds available at national banks for mortgage lending. "Because of the flexibility of the regulations, banks of all sizes should be encouraged to increase their already substantial role in housing finance," said R. Van Bogan, chairman of ABA's housing and real estate division.
Ralph Nader's Public Interest Research Group responded: "Any such public benefit -- which is highly speculative -- will be greatly outweighed by public injury resulting from homeowner hardship and reduced availability of mortgage credit for moderate income persons." PIRG gave the following example of how rates could rise. If a national bank had issued a 10 percent ARM in February 1978, pegged to the six-month Treasury bill rate, the mortgage rate would have risen to 14 percent by February 1980, a 35 percent increase.
Stated another way, a 12 percent mortgage rate that goes up 2 percent points year increases a homeowner's monthly payment by 15 percent annually. During the two-year period 1978-79, median family income in the United States rose by 23 percent or 11 1/2 percent per year. The family with a median income could hardly have afforded such a mortgage, not to mention the family below median income.
Rep. Benjamin Rosenthal (D-N.Y.) of chairman of the House commerce, consumer and monetary affairs subcommittee, stated: "Increased of this magnitude will far exceed the income gains of most families and will make these loans too risky for ordinary homeowners. Only the rich and those with a gambling steak will be able to go to banks for mortgage loans. Banks have a responsibility to serve their entire communities. These rules encourage banks to skim the mortgage market, serving only the affluent and ignoring the ordinary home buyer. They are one more example of the comptroller favoring the banks and ignoring his responsibilties for consumer protection."