A little publicized but important controversy over the price of mortgage money is bubbling to the surface here -- and could directly affect your choice of home financing this year or next. For example, it could open up the door to highly attractive 9 1/2 to 10 1/2 percent mortgages in your community within the coming six to 12 months.
Boiled down to its essence, the issue is this: The evidence is strong that adjustable-rate loans in many metropolitan markets are now overpriced.
Savings and loan associations and banks, which once trumpeted adjustable-rate mortgages as the wave of the future, have been writing fixed-rate loans hand over fist at 12 3/4 percent, while charging consumers less than 1 point less for adjustables. These same lenders, meanwhile, are flush with new money-market deposits currently costing them an average of 8.2 percent a year nationwide.
A 12 3/4 percent rate for 30-year, fixed-payment loans may be understandable, given the uncertainties of inflation levels five to 10 years down the road. But to charge home buyers more than 11 percent for adjustable-rate loans -- which carry virtually no inflation risk whatsoever to the lender -- is tough to justify.
That, at least, is the opinion of a growing number of mortgage-market analysts, thrift executives and other lenders.
Few of them care to speak out publicly on a sensitive issue that smacks of overcharging, but several agreed to discuss it last week.
"I think the whole pricing structure has gotten out of hand," said Tim Howard, chief economist for the $73-billion-asset Federal National Mortgage Association. "You can't expect intelligent home buyers to take loans that carry higher inherent risks to themselves [adjustables] if you don't offer a sizeable price differential."
Adjustable-rate mortgages at anywhere near 12 percent "make no sense whatsoever" in the current marketplace, in Howard's view. A lender who agrees -- and puts his money with his opinions -- is Joseph A. Halizak, senior mortgage vice president of the Buffalo, N.Y., Empire of America Federal Savings Association.
Empire is one of a small but growing number of lending institutions around the country that believe adjustable-rate loans can and should be priced under 10 1/2 percent in the current economy. In its far-flung lending areas, ranging from upstate New York to Michigan, Texas and Florida, Empire now offers 9 3/4 percent mortgages up to $108,300, and loans of $150,000 to $250,000 at slight premiums above that level.
The mortgages are all for 30 years, go up to 95 percent of home value (i.e., a 5 percent minimum down payment), and carry a two-point charge at closing. (A point is equivalent to 1 percent of the principal mortgage amount.) The rate on the loans must be readjusted -- up or down -- once a year, according to movements in an index based on one-year Treasury securities. No annual increase or decrease can be greater than 2 percent, however. In mid-1984, in other words, Empire's borrowers could be the holders of home loans at 7 3/4 percent, 11 3/4 percent or anywhere in between, depending upon the course of interest rates nationwide.
Halizak said that consumer reaction to the 9 3/4 percent loans has been "fantastic -- which merely proves our point: Home buyers will buy adjustable loans, provided they carry fair rates." Buyers would be "foolish to take all the risk of inflation and pay fixed-rate prices of 12 percent," he added.
Empire has committed more than $370 million worth of its cut-rate mortgages in the past seven weeks. It plans to keep up the flow as so long as the market demands it.
A similar adjustable-rate plan has just been introduced by a small suburban Chicago savings and loan association, with equally strong consumer response. Arlington Heights Federal Savings and Loan Association is offering 9.9 percent loans for 30 years, with annual adjustments and a two-percentage-point maximum annual increase.
"My gut feeling is that we're going to be cutting that rate a year from now, not raising it," Chairman and President Donald F. Morton said. "I can see us offering 9.2 percent adjustables next year" -- so long as inflation stays low, and short-term money market rates stay in the single digits.
In the Washington area, a handful of lenders have begun offering discounted adjustable-rate loans, but the vast majority still quotes rates in the 12 to 12 7/8 percent range, according to Interest Data Reports, which is published by Peeke & Associates.
Maryland Federal S&L, for example, offers an 11 1/2 percent 30-year loan, with two points at closing and rate adjustments every 12 months.
Kissell Co., a mortgage banker active here, offers a 9 7/8 percent adjustable up to $108,300, with the rate tied to short-term Treasury bills. Unlike the Empire and Arlington Heights deep-discount plans, however, Kissell's mortgage plan involves negative amortization during the five-year adjustable periods. In other words, the principal debt owed by the home buyer is likely to grow rather than decrease -- particularly if short-term rates jump sharply.