Mortgage loan activity in the Washington area has picked up since interest rates began to decline, but the market is still very spotty, according to lenders.

Talks with mortgage company and savings and loan executives indicate that most of the activity is concentrated in loans backed by the Federal Housing Administration and the Veterans Administration, on which the rate is now 14 percent. Most sales financed with conventional loans involve buy-downs to rates lower than current market rates. And adjustable rate mortgages are having wider acceptance, although almost everyone still prefers the 30-year, fixed rate mortgage, the lenders say.

Surveys by the Federal Home Loan Bank Board and Interest Data Reports quote an average interest rate in the Washington area of between 15 and 15 1/2 percent in the final days of August. IDR cites mortgages being offered at rates between 14 7/8 and 16 7/8 percent. Seventy percent of area lenders are now making loans, according to IDR.

The prospect for significantly lower interest rates is not good, according to Roy G. Green, chairman of the U.S. League of Savings Associations. He points out that savings and loan associations, which provide a substantial share of mortgage money, have a lot of money tied up in 30-month savings certificates, the fastest growing type of deposit. Until last week, S&Ls had to pay savers 13 percent on those CDs.

"Interest rates were falling two years ago, but that decline turned out to be very short-lived," Green noted in a recent speech. "We cannot drop mortgage rates very far until we are certain that the present rate decline is real."

Despite the quoted rates, the actual rates paid for conventional mortgages these days are lower. No figures exist for these interest rates because of the variety and the complexity of the deals offered. However, several mortgage companies mentioned payment rates of below 10 percent. The payment rate is the interest rate on which the initial monthly payments are based, not the true rate of interest paid over the life of the loan.

The following assessments of the Washington market were made by area lenders:

Joseph W. Rogers Jr., assistant vice president of Banco Mortgage Co. in Rockville, said FHA-VA loans make up a much larger portion of the firm's business than usual. Even higher priced houses in Montgomery County are being sold this way, he noted.

Low interest rate loans that have been sold in the secondary market to the Federal Home Loan Mortgage Corp. can still be assumed. But in what is otherwise a buyer's market, the buyer is captive in this case to the lender servicing the loan. Whereas the assumption fee used to be 1 percent, Rogers said that 3 to 5 percent is more common nowadays.

Customers still want fixed rate mortgages unless they are only planning to stay a short time in their new homes. Rogers said seven-year balloon mortgages now have a good acceptance, particularly by upper income buyers. The gray area is five years; people planning to move by then will take adjustable rate mortgages, especially those on which the payment does not change for five years. Customers planning to live in their houses for more than five years would still prefer a fixed rate mortgage even if it means paying points up front.

Banco's 15-year FHA-Va mortgage is very popular, Rogers said, because of its 11 percent payment rate plus 11 points to the seller and one to the buyer. On an $80,000 loan, the monthly payment is $909.28 at 11 percent, versus $947.90 at 14 percent. The total savings over the life of the loan, as compared with a 30-year loan at 14 percent is $163,670.

James B. Capps, branch manager for Kissell Co., reports a "tremendous" pickup in volume over the last few weeks. He says three quarters of the loans negotiated involve buy-downs. Among the popular formulas are 3,2,1 and 5,3,1. In the first the seller will subsidize the mortgage for three years so that the interest rate will increase by once percentage point annually, starting at 11 7/8 percent, until it reaches 14 7/8 percent where it stays for the remainder of the mortgage. In the second case, where the loan is subsidized for five years, the initial interest rate is 10 1/4 percent, moving up to 15 1/4 after three years and remaining there until the loan is due in seven years.

Kissell also reports on the growing acceptability of the seven-year balloon mortgage. It now costs 7 1/4 points to the seller to buy down a mortgage to this level for seven years, versus 9 points for a permanent buy-down for a 30 year mortgage.

The amount of refinancing going on is "unbelievable," in his words. People who got their loans a year or 18 months ago when the rates were 2 percentage points higher than they are now want to renegotiate. He observed that the VA made it easy to refinance, but reminded applicants that owners must pay both buyer and seller points plus closing costs to refinance. However, the costs can be absorbed by taking out a somewhat larger loan to cover then. The general rule of thumb is that refinancing a 30 year mortgage is worth it if interest rates come down 2 points.

Capps says that adjustable rate mortgages are popular in condominium sales. Rates on adjustables tied to short-term Treasury securities have actually fallen below 10 percent. On these loans, the rate changes every six month, but the payment changes only once a year. Although short-term fluctuations run against most buyers' desires, this is often the only way marginal customers can qualify for a loan, so they accept it.

Kissell also reports considerable activity in assumptions through the Federal National Mortgage Association. Through Fannie Mae's resale-refinance program, customers get a blended rate somewhat below market. For example, if a $60,000 mortgage with a 9 1/4 rate is assumable, Fannie Mae might offer the customer a new loan for $107,000 at 12 3/4 percent.

Fannie Mae reports the popularity of that program resulted in sales of $789 million this year in assumption-blended rate loans. Of the $409 million in loans it has bought this year, just $120 million has been in conventional or FHA-VA mortgages; the rest represents various types of adjustables and creative financing.

Richard G. Napp, assistant vice president of Colonial Mortgage Corp., reported that activity was "pretty good" in the past two months. "We're seeing activity we didn't see 60 or 90 days ago," he said. He observed that there are fewer short term buy-downs and more permanent buy-downs, both by builders and owners in resales.

Compared with the mortgage companies, savings and loans are not seeing much activity. Stephen E. Cox, vice president of Chevy Chase Savings and Loan says loan applications are up about 10 percent, but he concedes that might be attributable to seasonal factors. Like the others, he sees an upsurge in government-backed loans, and substantial buy-downs from builders, but not from home sellers. Much of his volume is in adjustable rate loans, with interest rates of 10 to 14 percent. "People would prefer a fixed rate loan, but now that interest rates are coming down, an adjustable is not too much of a gamble."

By contrast, Thomas Owen, chairman of Perpetual American, observed no increase in activity. "The real estate brokers haven't brought us anything yet. I think conventional rates will have to get down to 13 1/2 to 14 percent before you see some activity."