Mortgage lenders are pressing the Department of Housing and Urban Development to raise interest rates on FHA loans as a way to stop "deterioration" of the home sales market.
The Mortgage Bankers Association has asked HUD to raise the FHA rate by "at least" half a percentage point, from 11 1/2 to 12 percent, said Mark J. Riedy, executive vice president of the organization. The Federal Reserve Board is loosening its control of the money supply, putting pressure on long-term interest rates, he said.
"We asked for the increase orally, and we will put it in writing if we have to," Riedy said. He predicted HUD would raise the rate within days but a department spokesman said the department has no plans for an FHA rate hike.
A result of rates pegged too low for the market is the addition of points, usually charged to home buyers rather than sellers. A point equals one percent of the mortgage amount, and as many as six and seven points now are being charged, "in the range where it begins to stymie" home sales, Riedy said.
Currently, most lenders, particularly mortgage bankers, make a loan with the expectation of selling it to investors in the so-called secondary mortgage market. When the interest rate on the loan is too low to attract investors, the lender must discount it. The discount raises the yield of the loan to the investor and encourages him to buy.
The lender tries to make up for the discount by charging points, and when, as with an FHA loan, the government sets the interest rate well below market, the number of points becomes quite large.
The maximum interest rate allowed on FHA-insured mortgages was cut to 11 1/2 percent early this month, the lowest level in nearly three years. HUD Secretary Samuel R. Pierce Jr. said at the time that the lower rate would "open the home-buying market to as many as 1 million more Americans. . . ."
Some lenders accuse HUD of holding the FHA rates down to try to put downward pressure on conventional loan rates.
The prospect of new interest rate increases is bad news to builders. The backlog of demand that has brought crowds of home buyers out looking for houses has diminished, particularly among young, first-time home buyers, said Michael Sumichrast, chief economist for the National Association of Home Builders.
"This has to do with the still very high interest rates of 12 1/2 percent and 13 percent on conventional loans . It takes a lot of money to make the monthly payment," said Sumichrast. "It is terrible to hear the secretary of the Treasury Donald T. Regan say we need tighter money. He will kill the market." Interest rates already are creeping up, he said.
Sumichrast believes that "what is needed for continued recovery of the housing market is a decline in interest rates." Bigger loans are needed as prices rise, he said, noting that selling prices of new homes grew by 2 1/2 percent last month.