Tunable mortgage rates sound sweet to home buyers and lenders

For many of today's home buyers, affordability is the only thing that matters. Which is why, in recent months, adjustable rate mortgages (ARMs) are being snatched up like discounted Cabbage Patch dolls.

It is ''extraordinary,'' says James W. Christian, chief economist of the US League of Savings Institutions. In November, ARMs accounted for 54 percent of the total loans originated, according to the Federal Home Loan Bank Board monthly survey of lenders (excluding FHA/VA loans). This is up from 33 percent in August. Some of the jump may be due to a rephrasing of the survey questions, hedges a board spokeswoman.

A National Association of Realtors nationwide survey indicates a hike in the use of ARMs from 9 percent in April to 23 percent in September. More recent figures are not available but, ''I have been talking to members in the field, and I'm sure that number has grown significantly. I think the bank board figures are essentially correct,'' said Ken Kerin, vice-president for economics and research at NAR.

The speed with which home buyers are flocking to ARMs is unprecedented, believes Craig Foster, president of Foster & Foster, a large real estate brokerage in Acton, Mass.

''In March of '83 roughly 70 percent of our sales were in fixed-rate 30-year mortgages, 30 percent in ARMs. In the following six-month period it went to 55 percent ARMs and 45 percent fixed rate,'' says Mr. Foster. ''That's never happened before in the history of real estate.''

Foster and mortgage bankers have found that young first-time homebuyers make up the bulk of ARMs purchases. Their growing income helps soften the risk involved if interest rates should head skyward.

John Holmes, for example, had his heart set on a $80,000 house in the suburban Boston area. A reasonable purchase for a single male pulling down a $42 ,000 annual salary, right? Well, no. John (not his real name) is only four months out of graduate school, is paying a new car loan, and can't afford more than a 5 percent down payment on the home loan. A traditional 30-year fixed-rate mortgage (now at 13.5 percent) is out of the question, he was told. His total loan payments would take too much of his earnings. The solution: a one-year adjustable rate mortgage at 10 1/8 percent from the Northern Mortgage Company, a mortgage bank in Norwell, Mass. The lower rate brings his payments down to an acceptable level.

If interest rates go up, he has a 2 percentage point annual cap that keeps his payment from rising too fast. Many loans also have caps of 4 or 5 percent over the life of the loan.

The surge in ARM popularity is one reason housing starts reached the 1.76 million mark (November's seasonally adjusted annual rate) in 1983 - and in part why home sales are expect to remain strong through the spring of this year. For every percent point drop in interest rates, 1.5 million more potential buyers qualify to purchase a mortgage, according to a NAR spokesman.

Economists and mortgage lenders cite several reasons for the new vigor of this product, which has been around the past three years.

* Interest rates on government-backed mortgages bottomed out at 11.25 percent in May and by August had rebounded to almost 14 percent. ''When interest rates rise, the qualifying income rises for fixed-rate mortages. If a buyer was making up his mind in June, suddenly he either had to forget it or go to an ARM,'' explains Warren Matthews, senior economist of the Mortgage Bankers Association of America.

* ARMs have become more competitively priced in recent months and, consequently, more acceptable to buyers.

''When ARMs first came out, most lenders offered just a 1/4 percent lower than the fixed rate. At that price many people didn't want to take the risk. But if it's pegged to a treasury bond, there is still a difference of two or three points between the bond and the fixed rate. Now the spread is larger. Fixed rates are at about 13.5 percent and (some) ARMs are about 10 percent,'' says Matthews.

* In April, the Federal National Mortgage Association (Fannie Mae) reduced the number of ARMs plans it prefers to buy from more than 100 to three. The Fannie Mae ARMs are now pegged to one-, three-, and five-year Treasury securities. These ARMs often include a 5 percent life of the loan cap and 1 or 2 percent annual interest ceilings.

''Fannie Mae has helped standardize ARMs plans. It took the lead and in a sense forced a lot of plans to be simplified. And Fannie Mae offered consumer protection with interest rate caps,'' explains Fred Flick, an economist at the National Association of Realtors.

Another byproduct of reducing the number of ARMs was to narrow the marketing efforts of loan originators.

* Finally, thrifts have a strong incentive to push ARMs. If interest rates do rise, lenders don't want to be stuck with fixed 12- or 13-percent mortgages in their portfolio. With interest rates fluctuating as they have over the last few years, ARMs take some of the risk out of holding home mortgages.

Many economists are predicting steady or slightly lower interest rates through next spring. ''And because of the acceptance of ARMs now, I don't think even a 1 or 2 percentage point increase in interest rates can do a lot to knock us out of the box,'' said Craig Foster of Foster & Foster, a residential brokerage.

Economists are mildly bullish, too, on new home starts, pegging them at or somewhat above 1983 levels. Personal income among first-time homebuyers is rising. And, in many parts of the country it is still a sellers market.

''New home prices, up by 9.5 percent last year, have risen very sharply considering the inflationary environment,'' says Mr. Christian. Material shortages and builder buydowns have tended to jack up prices. He looks for some moderation in home prices this year.