Managers of lending institutions attending the annual mortgage conference of the National League of Savings Institutions were urged to start selling adjustable-rate mortgages instead of conventional 30-year fixed-rate mortgages, as a hedge against continued high interest rates.

But speakers at last week's conference, many of them managers of savings and loans, warned that adjustable-rate mortgages (ARMs) are difficult to sell to homebuyers and that lending institutions should try to offer a variety of plans as a way of making ARMs more attractive.

"They ARMs are not the most preferable mortgage from the point of view of the borrower," said Donald R. Britton, senior vice president for the Goldome Realty Credit Corp. in Buffalo, N.Y. "Since the borrower shares the interest rate risk with the lender, their willingness to do so will vary with the interest rates."

Basically, ARMs include all mortgages that have variable rather than fixed interest rates. Most ARMs have two variables: one is the index that the interest rate on the mortgage is tied to and the other is how often the interest rate on the mortgage is adjusted.

James F. Aylward, president of Investors Mortgage Insurance Co. in Boston, said that his company did a survey of borrowers and concluded that the average homebuyer was reluctant to take an ARM unless the starting interest rate was at least 2.5 percentage points below the going interest rate for fixed-rate mortgages.

"If the interest on a fixed-rate mortgage is 14 percent, than a variable-rate mortgage will have to be at least 12 percent or lower to attract homebuyers," said Aylward. "And if the interest rate for a 30-year, fixed-rate mortgage drops to 12 percent, you will find you'll be pressed to make those kinds of loans instead of variable-rate mortgages."

Richard Daniel, vice president for marketing with the Federal National Mortgage Association (Fannie Mae), said that his association has found its five-year adjustable mortgage to be a big seller, as well as ARMs with built-in consumer protections.

"The popular ones are the ARMs with either a cap on how high the interest rate can go over the life of the loan or a cap on how much the rate can go up for each adjustment period," said Daniel. "ARMs have been very successful at solving the housing need of the people they are designed for, and that is why there are so many different ones being offered. For some people they are better than a fixed-rate mortgage."

The three plans currently offered by Fannie Mae include an ARM that is adjusted every year, an ARM that is adjusted every three years, and an ARM that is adjusted every five years. All of those plans link the change in the interest rate to the interest-rate fluctuations of Treasury securities.

The one-year adjustable was being offered this week at 11.3 percent interest rates. The terms of the ARM mean that next year that interest rate would be adjusted either up or down according to the variation in the money markets over that period. The three-year adjustable was offered at 12.3 percent and the five-year adjustable at 12.8 percent.

"For some people an ARM means they have a better chance of qualifying for a mortgage, if the intitial rates are lower," said Daniel. "ARMs can also be written to allow the homebuyer to defer paying interest, also called negative amortization, which appeals to the homebuyer who believes his earning power will increase over the life of the loan."

Daniel said that national surveys show roughly 30 percent of homebuyers are willing to go with an ARM instead of a fixed-rate mortgage. Borrowers attracted to ARMs include people who do not qualify for a mortgage at higher, fixed rates, those who do not plan to own a home for longer than five years or executives with companies willing to buy them out of a mortgage if they are relocated.

"In middle America, where mortgages average about $80,000, an ARM can be attractive to the consumer if it is even just 1.5 percent points below the interest rate for a 30-year, fixed-rate loan," said Aylward. "But with the jumbo loans, and with cases where executives are being transferred, ARMs that are closer to the rates for conventionals loans are also being sold. It's no longer true anymore that a mortgage is a mortgage is a mortgage."

With so many options available, some mortgage bankers conceded that confusion has made consumers skittish.

"I do think the market is confused and that is why we consolidated our plans last year down from eight to three," said Daniel of Fannie Mae. "The diversity offers more choice for the homebuyer, and it is up to the consumer to shop around. But the lack of understanding is a tough problem and we need to make more of a push on educating the public."

James P. McTernan, senior vice president for City Federal Savings and Loan Association in Elizabeth, N.J., said at the conference that his company gave a larger commission to sales people who pushed specific ARMs successfully.

"Often there's a plan that is advantageous to us, and we give the salespeople a 25 percent more in their commission if they can sell them," said McTernan. "When the sales person sits down with the homebuyer and goes through all of the different financing plans, many homebuyers just turn to the sales person and ask, 'Well, what would you recommend?' It works for us."

Consumers confused about ARMs should look for the plan tailored to their needs, said Daniel. There are plans with consumer protections in them and plans that vary less often. But, said Daniel, those cost more.

"The party who takes the risk will be paid for doing so," said Britton.