Rising interest rates are once again threatening the US thrift industry and the housing market. They are also expected to hasten the issuance of new "variable-rate mortgages" (VRMs) by lending institutions. As the VRMs are now structured, that presents genuine long-range problems for a society that has sought to ensure the opportunity for all Americans to own their homes.
The problem is not with the concept of VRMs, but rather with the way federal officials have allowed them to be issued. In fact, adjustable-rate loans represent an innovative way of providing home-mortgage money at a time when mortgage funds are increasingly hard to come by and when inflation keeps shoving interest rates higher. Essentially, VRMs are mortgage instruments in which monthly payments fluctuate over a period of time, depending on changes in interest rates in financial markets. Thus, they differ sharply from the traditional "fixed" mortgages common to America since the 1940s in which the interest on the mortgage loan is constant and the buyer thus has the same monthly payments over the life of the loan.
Now many thrift officials say that fixed mortgages are dead for all practical purposes, given interest rate hikes. VRMs, by contrast, are seen to be the wave of the future and will probably soon become standard not only for home purchase but for car loans, retail purchases, and even credit cards.
At least one House committee will be examining VRMs later this month, with others to follow. Lawmakers need to ask some tough questions about VRMs as now authorized.
* Should there be a cap on interest rates under VRMs? Adjustable mortgages offered by national banks and by thrift institutions (mutual savings banks and savings associations) currently differ sharply. The interest rates offered by the national banks cannot rise more than one percentage point each six months, or a total of two points a year. Mortgages issued by thrifts have no such restrictions. The difference means potential hefty dollar outlays for consumers.
* Should there be a cap on the total monthly payment possible under the adjustable loan, as well as the loan balance? Think of the consequences for a family (and that usually means a younger family with small children in the home-buying category) which suddenly wakes up one morning to find its total mortgage payments jumping sharply, and with no end in sight to that increase unless such a limitation is in the mortgage?
* What about disclosure terms in the mortgage? Currently, lenders need only list the initial interest rate, disclose the index used to decide the rate increase (such as the interest rate on Treasury bills) and an example of what could happen under an increase.
An estimated 42 million Americans will reach their home-buying years in the 1980s. That means great price competition for available housing stocks. Congress must ensure that VRMs are properly structured and do not work against the American dream of an affor dable home for every family. Unfortunately, that may now be the case.