Consumers still have a strong preference for traditional fixed-rate mortgages over various types of new financing techniques, particularly the adjustable-rate mortgages and "balloon" notes that lenders and builders have been offering widely in recent years, according to a newly completed attitude survey by Louis Harris and Associates.
The nationwide survey also indicates, however, that buyers may be persuaded to accept different kinds of mortgage instruments if they make the difference in being able to afford to buy a home -- and if there are enough guarantees that future payments will not jump too sharply.
Commissioned by the Federal National Mortgage Association (Fannie Mae), the study showed that 72 percent say most people would pick a fixed-rate loan even when there is an alternative with an interest rate and monthly payment that begins at a "considerably lower level." Almost half of those surveyed said that most people would not buy a home if they could not get a fixed rate.
"It is important not to underestimate the strength of this basic mindset," Humphrey Taylor, president of Louis Harris, said at a press conference releasing the survey this week.
But after various mortgage instruments were described to the respondents, there was a shift. Asked to choose between the traditional fixed rates and the other choices as just described, more than half (53 percent) still picked the fixed rate, but 38 percent picked one of the other five plans offered (7 percent were either unsure or said "none"). Some of the percentages do not add up to 100 because of weighting and rounding procedures used in the survey.
Next to the fixed-rate loan, the growing-equity mortgage (GEM) claimed the second-best support, with 13 percent of those surveyed, while graduated-payment mortgages (GPMs) received 11 percent. Variable- or adjustable-rate mortgages (ARMs) were chosen by only 7 percent, while balloon mortgages were picked by 5 percent, and shared-appropriation mortgages (SAM) got only a tiny 2 percent of those surveyed.
With a GEM, payments change at the end of each year, but any increase is applied to principal rather than interest, so the loan is paid off faster. Those payments are lower in early years and higher in later years than with the traditional fixed-rate, fixed-payment plans.
Variable- or adjustable-rate mortgages involve periodic changes in interest rates and monthly payments according to some kind of economic or interest index, and payments can rise or fall. Balloon mortgages have set terms for only a few years and then the entire balance of the note is due and usually is refinanced with a lender at current terms. With SAMs, the buyer gives up part of his future profit on the house in return for a lower interest rate.
Lenders, who have had large losses because of old low-interest, fixed-rate mortgages they can't get off their books, have wanted to change consumers from the fixed-rate habit to such "interest-sensitive" instruments as ARMs that will protect the lenders from such losses in the future. Even though short-term rates have dropped sharply in recent weeks, lenders have been cautious in bringing rates down on the long-term, fixed-rate mortgages because they fear being caught again if rates jump up.
But consumers have shown a corresponding reluctance to take the risk of having their interest rate or monthly payments change according to unpredictable indexes. And although the ARMs originally were billed as a way to get lenders to provide lower initial rates, this has not been happening to any substantial degree, with ARM rates quite close to those for traditional 30-year mortgages.
When the fixed-rate mortgage was removed as an option in the survey, GPMs were chosen by 29 percent, GEMs by 22 percent, ARMs by 16 percent and balloons and SAMs by 4 percent each. Another 13 percent refused to make a second choice when fixed rates weren't available, and 10 percent said they weren't sure what they would do.
Many real estate brokers are seeing problems starting to occur with balloon payments coming due, a spokesman for the National Association of Realtors said. Consumers, hearing increasingly of these problems, are not willing to take the risks of refinancing just a few years from now.
The most recent preliminary figures from the National Association of Realtors show that about 70 percent of all families buying a resold home use some form of assumption of a lower-interest, fixed-rate mortgage or use seller below-market financing. Of the 30 percent getting loans from institutions, 52 percent choose fixed-rate mortgages, 10 percent ARMs, 10 percent notes with balloons and 4 percent GPMs.
"There is no question in my own mind that the overwhelming preference is for a 30-year, fixed-rate mortgage," Fannie Mae President David O. Maxwell said. But he said the survey shows that home ownership takes precedence and that, "If buyers see that a new type of mortgage will get them into the house, they will take a look at it."
Fannie Mae, a for-profit corporation, is the largest purchaser of mortgages in the secondary market, buying loans from local lenders and getting funds from investors by selling mortgage-backed securities.
The Fannie Mae survey shows that more people accept ARMs if a ceiling is put on the amount the rate can rise at every adjustment period, if the time between adjustments is lengthened and if the rate is substantially lower than for fixed-rate mortgages. But so far those conditions have not existed in the real world of ARMs.
Respondents were asked to choose among 1) a 17 percent fixed-rate loan, 2) a 14 percent ARM with changes every two years of up to 2 percentage points in the rate and monthly payment and 3) a 14 percent ARM with unlimited changes every five years according to an unspecified index. Nineteen percent picked the last choice, 28 percent the second choice and 39 percent still preferred the fixed rate even at 3 percentage points higher than the rate for ARMs.
But the interest levels on fixed-rate mortgages and on ARMs have been nowhere near that far apart. A survey done by the U.S. League of Savings Associations on lending in 1981 showed a difference of only a half a percentage point between the fixed rate and the ARM rate on mortgages written last year.
Richard A. Reed, vice president of the Federal Home Loan Mortgage Corp. (Freddie Mac), said that ARM rates now vary from being about the same as on fixed-rate mortgages to being perhaps one-half percentage point lower.
And William Sinclair, president of Perpetual American Savings and Loan, the city's largest, confirmed that is about as far as the spread gets now. With a fixed rate of slightly more than 15 percent, rates on an ARM would be one-half percentage point less at best for one with a rate that is adjusted frequently, he said. About the only type of ARM that is working is one combined with graduated payments and buydowns.
"The buyer wants to know what the payments are going to be in five or seven years," Sinclair said.
Other area experts said that only limited categories of consumers are accepting ARMs: those that take one with a long period between adjustments and believe they will move before that period is over, people who simply cannot find any other way to buy the home and people counting on rates going down. The last group would rather have the guaranteed decline of the ARM adjustments than the cost and hassle of refinancing a higher fixed-rate mortgage, particularly because refinancing becomes economical only when rates have dropped at least 2 percentage points, these experts say.
But Fannie Mae's Maxwell said the differential between the initial rate on ARMs and on fixed-rate loans is widening because short-term interest rates are falling sharply while long-term rates are not. Fannie Mae's own yield levels, which it says are close to what lenders are likely to charge, are 15 percent for fixed-rate mortgages but slightly less than 13 percent on the most frequently adjusted ARMs. Still on the ones with adjustments only every five years -- the most acceptable to the consumer -- Fannie Mae's required yield is 14 1/2 percent.
Maxwell also predicted that, the more consumers become familiar with the new techniques, the more they will accept them. "I think the jury is out on how these mortgages will be received over time," he said at the press conference this week. "We haven't had a fair test yet of alternative mortgage instruments."
Other findings in the survey of 1,010 persons, conducted in March and April included:
* The most frequently cited reason for buying among homeowners was wanting to own property for investment purposes (40 percent) and to settle down and have roots (35 percent).
* Among renters, the most frequently cited reason for not buying was not having the money for a down payment (59 percent) and interest rates being too high (36 percent).
* Almost everyone believed that it takes a two-income household to afford a mortgage today.
* People expect to move less in the next few years. About half of the respondents had moved in the past five years, but only 38 percent said that it is likely they will move in the next three to five years.
* Most people (79 percent) preferred a single-family detached home, with only a small percentage each opting for duplexes, condominiums or cooperatives.