MORTGAGES: Toward Variable Rates

One of the advantages of buying a house rather than renting has been that mortgage rates cannot be raised as rents are. That situation may be changing. Last week the Federal Home Loan Bank Board urged that federally chartered savings and loan associations be allowed to offer mortgages with rates that would go up—or down—in tandem with the cost of money to banks. Such a measure, the board contends, would ease future credit crises in housing.

In 1973 Congressmen pressured the board to withdraw a similar proposal for variable interest rates (VIR), but that was before a credit drought drove home-mortgage rates to more than 10.5% last year and dried up housing construction. Unless Congress specifically votes down the idea, federally chartered savings and loans will begin offering the new VIR mortgages in about six months. Borrowers would then be able to choose either VIR or fixed rates on their mortgages.

Consumer groups in the past have opposed VIR on grounds that the mortgage rates would probably rise—at painful cost to people on fixed incomes. Opposition may well be less now. Under Bank Board Chairman Thomas R. Bomar’s proposal, variable rates could go up no more than 2.5% over the life of a mortgage and no more than .5% each six months; a .5% increase would amount to about $12.50 per month on a $30,000 loan. Last month two of the largest California S and Ls, which are non-chartered and thus not subject to the bank board, abandoned fixed rates and moved exclusively to VIR. As an inducement, one is guaranteeing no rate increases for a year.

VIR advocates, including Federal Reserve Chairman Arthur Burns, say that the innovation would lead to lower rate levels. One reason: new mortgage borrowers would not have to compensate banks for mortgages that were negotiated earlier at unprofitably low rates. Bankers estimate that if rates had been floating since 1960, they could now be a full point lower than the present 9.4% average on new mortgages. In addition, U.S. mortgage rates are expected to ease this year, and so the first experience of home buyers assuming floating mortgages could well be a shift downward.

Lenders also argue that if they could charge temporarily higher rates to mortgage holders in times of tight credit, they could afford to pay higher rates to depositors. In that way, they could attract more deposits—and thus make more loans.