Mortgage payments have historically been tied to the ground by fixed interest rates. But recent moves by the federal government promist to loosen the shackles on home loans by making it easier for banks to offer adjustable-interest-rate mortgages (ARMs).
Currently, nationally chartered banks can't offer ARMs. But the comptroller of the currency held hearings over the first week in December on its proposed regulations for national bank ARMs. With two other federal agencies, the comptroller is working to create a standardized format. Such a development would enable the mortgages to be sold in the secondary mortgage market -- opening up a vast new market and making it much more lucrative for banks to offer them.
The comptroller, by seeking comment on the details of variable-rate mortgages , has served notice that it will soon legalize such loans for national banks. An agency spokesman says final regulations should be available sometime in late January, if paper work proceeds smoothly.
The aim is to keep mortgage money available even though economic skiers are darkening with today's high interest rates. The result may foreshadow what will happen to all long-term financial commitments in an inflationnary economy.
An ARM's interest rate is not fixed; instead, it is pegged to a movable measure, such as the prime rate.
"Simply because of the volatility of interest rates they're the coming thing, " says Dale Riordan, chief economist of the National Savings and Loan League.
Some small state banks already offer varieties of ARMs. And in 1979 the Federal Home Loan Bank Board (an agency that oversees savings and loan associations) permitted S&Ls to begin making adjustable-rate mortgages, within certain limits. Masquerading under the acronym VRM (variable-rate mortgage), this loan features an interest rate tied to a cost-of-funds index produced by the Federal Savings and Loan Insurance Corporation. Rate adjustments can be made once a year. They can't exceed 0.5 percent at a time, and net increase over the life of the loan is limited to 2.5 percent.
When notified that his interest rate is going up, a borrower has two options: Either increase the monthly payments, or increase the length of the loan.
Bank industry opinion hopes the final rules being devised for commercial bank ARMs will be less restrictive than those already imposed on savings and loans.
"I do believe we would be defeating in the purpose if we put a limit on the total rate increases over the life of the mortgage," testified Dale Emmel, president of the First National Bank of Sauk Centre, Minn.
"In today's market, the rate must be allowed to change as often as the cost of our funds changes," said W. Carlisle Mabrey III, president of the Citizens National Bank & Trust of Okmulgee, Okla.
In conjunction with the comptroller's hearings, the Federal Home Loan Mortgage Corporation (FHLMC), which buys up mortgages from lending institutions so more home loan money will be available to borrowers, and the Federal Home Loan Bank Board are gearing up to standardize the format of everybody's ARM. The former group has sent prototype forms to lenders in 47 states. By the middle of next year, it hopes to have shaped a standard loan form so adjustable-rate mortgages can be peddled en masse to the secondary market.
This means that large institutional investors such as pension funds, insurance companies, and government mortgage agencies will be able to buy up packs of mortgages from the original lenders without having to cover each individual loan line by line.
"The importance goes beyond selling them to us," says Mary Batte, vice-president at FHLMC. "These forms will be used and understood by many lenders. It's a level of standardization that's useful."
"Uniformity would be a virtue," says John Medlin Jr., president of the Wachovia Bank & Trust Company of Winston-Salem, N.C., "so long as that uniformity doesn't mean unnecessary regulations." A lending institution writing ARMs knows it probably won't lose money, in real terms, over a period of time. That's not the case with a standard loan. With inflation going up like a hawk after a sparrow, few banks want to tie up their money for 30 years at even 15 percent interest.
"As it stands, we are not very interested in loaning money for real estate purposes," says Larry Maschkoff of the First National Bank of Nashville, Ill.
Since a good stable mortgage is one of a consumer's best hedges against inflation customer reaction to ARMs will undoubtedly not be wild enthusiasm.
"To go through that for 30 years doesn't give one peace of mind," a concerned citizen comments.
Bank officials contend that without adjusable loans there won't be any mortgage money, period.
And they claim the resulting solid revenues would enable them to pay competitive rates on consumer savings accounts.
"Home buyers have been subsidized by savers," Mr. Medlin says.
"somebody has to pay for the lunch."