An undeclared price war heating up in the American home mortgage market could spell big savings to sharp-eyed consumers who shop for cut-rate loans in the next several weeks.
The number one protagonist is the biggest lender in the marketplace--Fannie Mae, the Federal National Mortgage Association.
Fannie Mae, the source of money for one of every seven home loans nationwide last year, has just informed thousands of local lenders that it is discounting rates on all adjustable mortgages across the board.
In the equivalent of a "back-to-school, limited-time-only" special sale of mortgage money, Fannie Mae will buy one-year adjustable-rate mortgages at 11.35 percent, three-year adjustables at 12.15 percent, and five-year adjustables at 12.7 percent. Lenders have until early November to close the loans, and can add administrative fees.
Fannie Mae's new rates are significantly below what most banks and savings and loans quote today, and are virtually certain to stimulate hundreds of millions of dollars' worth of new loan commitments by local lenders. Fixed-rate, 30-year loans in most areas now go for 13 3/4 to 14 percent--too high for many would-be home buyers.
(Fannie Mae purchases loans made by lenders such as savings and loan associations, mortgage bankers and commercial banks. By selling to Fannie Mae at specified rates, local lenders don't have to commit their own dollar resources or deposits to finance housing. Instead, they merely "service" local loans on Fannie Mae's behalf--handling the paperwork and collecting the monthly payments--for an annual fee.)
Fannie Mae's vast size and nationwide reach enable it to have immediate effects on the home-mortgage market. The latest price cuts on adjustables should be reflected in lower quotations for home buyers shortly.
The back-to-school special--which Fannie Mae has not announced to the general public--is aimed in part at its cross-town competitor in the nation's capital, Freddie Mac, the Federal Home Loan Mortgage Corp.
Congressionally chartered and privately run like Fannie Mae, Freddie Mac recently has made an aggressive grab for local lenders' adjustable-rate loan business. Freddie Mac has sought to woo lenders by offering larger fees and lower rates on adjustable mortgages and has begun making a dent in Fannie Mae's dominance of that segment of the market.
For example, Freddie Mac has offered cash rebates, or "development premiums," to local lenders who commit to sell adjustable loans to the corporation between Sept. 1 and Dec. 31.
It also has introduced the first convertible-adjustable-rate mortgage, aimed at attracting home buyers who fear rate hikes in the distant future. The "convertible-adjustable" allows the home buyer to switch to a fixed rate at no cost at the end of an initial three- or five-year period.
Fannie Mae's new loan sale offers fees and incentives to lenders as well, but carries loan rates carefully pegged below Freddie Mac's. As of Aug. 26, for instance, Freddie Mac's one-year adjustable-loan quote was 13.01 percent (versus Fannie Mae's 11.35 percent). Its three-year adjustables were going for 12.37 percent (versus 12.15) and five-year loans were at 12.89 percent (versus 12.7).
(Fannie Mae's and Freddie Mac's rate quotes change daily. Both sets of quotes could be slightly lower or higher than these levels during the first two weeks of September.)
"Call it a good old-fashioned gasoline price war or whatever," said a top Fannie Mae executive. "We're going after the business that we know is out there waiting for lower rates--and I think that's a healthy competitive situation for the consumer."
Not all cut-rate, adjustable-mortgage plans you'll find in your local market during the next several weeks will be Fannie Mae's or Freddie Mac's. Dozens of aggressive local savings banks and S&Ls are joining the competition with special loans of their own crafting--sometimes with lower rates than the national lenders' best.
Baltimore's big Loyola Federal S&L, for example, has just announced a new Adjustable Interest Mortgage (AIM) plan with 11 percent annual rates and three-year adjustment periods.
Although more attractive then Fannie's or Freddie's version at first blush, the AIM plan is indexed to 26-week Treasury bills--a more volatile, shorter-term rate gauge than the one-year Treasury indexes used by the national lenders.
The rub is this: If short-term rates drop fast, the short-term adjustable index will pass these on to the consumer faster than the other plans. But if rates skyrocket, the long-term indexes--such as the three- and five-year Treasury securities used by Fannie and Freddie--will protect the consumer more effectively.