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Mortgage lenders unveil plethora of new programs; rising interest rates cause refinance market to dry up

Los Angeles Business Journal, May 9, 1994 by Alan Waldman

Mortgage financing activity is increasing in Los Angeles County, according to several local lending institutions, as area lenders seek to counteract the chilling effects of rising interest rates by offering a range of new programs featuring low down payments, reduced fees and insurance, and higher loan limits.

As the refinancing boom dries up, home purchasers are shifting from fixed-rate to adjustable-rate mortgages (ARMs) in increasing numbers in an attempt to catch the affordable mortgage train before it steams out of sight.

There is greatly increased competition among lenders, particularly in the lower- and mid-priced housing markets, although the primary emphasis seems to be more on lenient terms than on lower price.

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Cliff Collins, senior vice president and national director of sales for Home Savings of America, L.A. County's second-largest mortgage lender last year, said: "There has been a big increase in the percentage of purchase loans vs. refinances here (at Home Savings). Refinancing comprises about 43 percent of what we have in the pipeline and 34 percent of the new applications. We have also noticed a profound shift away from fixed to adjustable rate mortgages. Currently 90 percent of our applications are for ARMs; last year, 80 percent of loans industrywide were fixed."

ARMs have become much more popular of late because of the spurt in fixed-rate interest -- from an average low of 6.8 percent last fall for a 30-year mortgage to an average of 8.6 percent in mid-April. Home Savings has ARMs that start as low as 2.85 percent. On a $100,000 loan, the monthly payment for this 2.85-percent ARM would be $413, vs. $769 for an 8.5-percent fixed-rate mortgage -- a significant difference.

"More people can afford houses today, and people can also afford more house," Collins said. "In the past 60 days, some ARMs have seen increases in their rates of 50 or 60 basis points, because they are tied to the more volatile indexes, like the T-bill. Those tied to the more stable 11th District Cost of Funds Index (COFI), however, have continued to decline. Since the vast majority of our ARMs are tied to the COFI, we have been able to lower the rates on them, while we have seen our competitors raising the rates on their adjustable mortgages."

Fixed-rate loans have more-stringent qualifying criteria than ARMs, because they are packaged for sale into the secondary market. Many ARMs are issued by portfolio lenders and held for future income.

Another reason for home buyers' shift to ARMs and away from fixed is that many ARMs' lifetime interest rate caps are still under 10 percent -- and the difference between the 9.95-percent cap and the fixed-rate (currently about 8.5 percent) is now very small. A few months ago, some ARMs had caps in the 11-percent range and fixed-rate mortgages were at about 7 percent -- a more dramatic gap.

Collins explained: "Because you can now get an ARM at a lower starting rate and not see it rise much higher, and because many of them are tied to a relatively stable index that is currently going down, a lot more people are opting for adjustable rate mortgages.

"Our applications came in about $125 million-a-month faster in March than February. And so far in April, we are on a pace that's another $100 million higher. One reason the volume of applications is up, besides the lower rates, is that we have changed the parameters on some of the loan programs.

"We have tried to provide first-time buyers and move-up buyers a new loan program only requiring 5 percent down. Lots of lenders have 95-percent loans. But what's unique about ours is that it goes up to $300,000, rather than to the Fannie Mae (Federal National Mortgage Association) limit of $203,150 our competitors follow."

Home Savings' new 95-percent loans were introduced in February and are a big hit, Collins reported. Such loans now compromise 10 percent of the thrift's total residential mortgage loan volume for homes under $1 million, with about $195 million of such loans currently in the pipeline. Other big advantages of Home Savings' 95-percent loans: the 5-percent down payment can be a gift from a family member, and there is no PMI (mortgage insurance) required.

PMI is usually required on loans over 80 percent of the value of the property and can run as much as three-fourths of a point initial premium at closing, plus one-half a percent annually, paid monthly. Moreover, PMI has its own set of qualifying criteria that are typically more rigid than those required for getting the loan itself.

Collins added: "Our focus group research with the real estate brokerage community told us that lots of people have a good job and decent credit, but don't have the down payment. We think the 95-percent loan will significantly stimulate home buying activity."

Meanwhile, the volume of fixed-rate mortgages has dropped precipitously at area lenders. At Home Savings, the rising rate environment has not affected underwriting guidelines, but has inspired the lender to offer fixed-rate borrowers the option to lock in the prevailing interest rate for 10, 30 or 60 days -- commencing any time between the time of application and the time the loan closes.

Business Services Industry

Mortgage lenders unveil plethora of new programs; rising interest rates cause refinance market to dry up

Los Angeles Business Journal, May 9, 1994 by Alan Waldman

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