Consumer demand has forced a comeback of the 30-year, fixed-rate mortgage, and lenders--some enthusiastically, others reluctantly--are accepting what they once had fought.
"Thrifts don't always want to make fixed-rate loans, but they're the loans that people who buy the houses want and need," admitted William Strasser, a regional vice president of Sunkist Service Co., the mortgage banking subsidiary of State Savings and Loan of Stockton, Calif.
Speaking at a Crittenden Program Dealmakers Conference outside Chicago last month, he said that the 30-year, fixed-rate mortgage is the "prime product" of State Savings in California and of Sunkist nationally.
Homebuyers are willing to pay a premium rate for a fixed-rate loan rather than risk a jump in an adjustable-rate loan priced lower to begin with, Strasser explained. He cited a California developer who could not sell homes with 8 3/4 percent adjustable-rate mortgages, but sold out with 12 percent fixed-rate loans.
Similarly, Miami's AmeriFirst Federal Savings, which dominates the Florida mortgage market, recently found that it could not sell home buyers on ARMs at a rate that was profitable for them.
The difference between interest rates on adjustable-rate and fixed-rate mortgages usually is small, more like one percentage point, and that reflects another problem with ARMs, in addition to public rejection: higher servicing costs and less interest by investors at a time when lenders prefer to sell off, rather than hold, the mortgages they make.
"Thirty-year, fixed-rate loans have a lot going for them," said Michael Stamper, vice president of the Federal Home Loan Mortgage Corp., which sells securities backed by mortgages it has pooled. "They are marketable, and you don't have that with ARMs. And they are easy to process and service; ARMs are not," he told a Mortgage Bankers Association marketing clinic in Chicago last month. "ARMs should have a lower rate, but right now that spread is too narrow."
The Federal National Mortgage Association's service charge on ARMs it buys recently was increased from three-eighths to one-half point. "We recognize that they are more expensive to service," said John Hayes, a FNMA regional vice president. Fannie Mae regularly buys eight different ARMs, and in the past two years it has bought "120 other types of ARMs under negotiated transactions" with lenders, according to Hayes.
Such a proliferation not only confuses borrowers but confuses investors, most of whom prefer to know what the exact return will always be on a mortgage-backed security.
"There's no uniformity of ARMs, so there's not going to be a market for them," complained Brian Hays, managing director of A. G. Becker Paribas Inc. in New York.
Stamper said both Freddie Mac and Fannie Mae should reach a standardization of ARMs by late fall, but he still said there would be from three to seven different adjustable-rate mortgage instruments.
Mortgage bankers, who are becoming a dominant force in home lending, never have shown the same negative attitude toward fixed-rate loans that savings and loans show. They also have been active in offering FHA and VA fixed-rate loans, loans that have become more popular and loans that the thrifts blame for their inability to find acceptance of ARMs.
In 1977, savings associations provided 53 percent of home loans and mortgage bankers only 16 percent. Last year, the thrifts' share had fallen to 37 percent, while the mortgage bankers' had risen to 29 percent. And in the first quarter of this year, 32 percent of home loan originations were provided by mortgage companies, while S&Ls accounted for 38 percent, according to the Department of Housing and Urban Development.
"Consumers are moving to mortgage bankers, who are offering them 30-year, fixed-rate loans," James A. Hollensteiner, a director of the U.S. League of Savings Institutions, warned his industry at the annual conference of the league's Institute of Financial Education in Chicago in March. Mortgage bankers "are moving in to take your place," he told thrift officials.
As thrifts became less active home lenders, mortgage bankers have moved to fill this void, offering mortgages to real estate brokers and to home buyers who walk into their offices. California-based Sunkist, for example, now has regional offices in eight cities outside California.
Before his Crittenden presentation, Sunkist's Strasser pointed out that, unlike savings institutions, mortgage bankers have to place the mortgages they make, "because they're not the investor." This has forced them to be flexible in order to survive, he said.
"I come from the savings and loan business," added Strasser, who for 16 years was president of Telegraph Savings and Loan Association in Chicago. "They have found it necessary and prudent to carry most of their money in the form of liquidity. That means they just don't have the money for long-term loans. Mortgage bankers who are accustomed to getting funds from investors have found they could fill this niche and do it quite effectively."
But savings and loans increasingly are selling off their loans, rather than holding them and risking losses on them if interest rates again rise. Those that do this usually are the ones still making long-term, fixed-rate loans.
"The large savings and loans are selling their fixed-rate loans; they aren't holding any," said Ron Myhro, president of Capital Advisors Inc., a financial consulting firm with headquarters in La Jolla, Calif. "Only the smaller S&Ls may be holding them."
In the face of consumer and investor resistence to ARMs, California institutions have had to continue offering 30-year, fixed-rate mortgages.
"If Home and Great Western can't sell them, who can?" asked John P. Long, regional vice president of the real estate loan department of the $7.3 billion-asset First Nationwide Savings & Loan Association of Pleasant Hill, Calif., referring to that state's two largest thrifts.
"People aren't buying some of this stuff very well," he commented at the Institute of Financial Education conference. "There's been some problem with these instruments. The marketplace still is fixed-rate."