Fannie Mae and Freddie Mac are getting edgy about the rock-bottom interest rates that lenders are offering on adjustable mortgages.
The agencies, which buy mortgages from lenders across the country, are worried that consumers who take the loans will get hit with big increases in monthly payments when general interest rates head up again. Such increases, in turn, could produce higher delinquencies for lenders and the agencies.
It is a "credit issue of concern to the entire lending community," wrote Robert J. Englestad, a senior vice president at Fannie Mae, in a recent notice to lenders.
Fannie Mae, the Federal National Mortgage Association, tightened its standards this month to head off potential ARM trouble. It told lenders to start qualifying borrowers on the basis of their ability to handle a rate of least 7%, even if the adjustable carries a much lower starting rate. Previously, there was no such floor.
Freddie Mac, the Federal Home Loan Mortgage Corp., may soon follow suit.
The alarms come amid record-low wnterest rates for adjustables, which were introduced in 1981. Last week, lenders were offering an average initial rate of 6.19, down from 7.88% a year earlier, according to HSH Associates of Butler, N.J.
The average reflects an amazing 49 lenders that were offering adjustables at 5% or less last week, more than twice as many as a week earlier, the research firm said.
The risk, of course, is that rising market rates in coming years could produce increases in monthly payments outstripping the rise in borrowers' income. "It is more likely that interest rates in the future will increase rather than decrease," Mr. Englestad wrote.
Freddie Mac is "seriously considering" following Fannie Mae by adopting a 7% floor for qualifying rates, said John Hemschoot, director of mortgage credit policy at Freddie. He said an announcement could come next month.
A Philosophical Problem
"The question is, if borrowers need a real low rate to qualify, can they absorb the large increases that could result?" Mr. Hemschoot said in an interview.
For now, the 7% floor may not prove especially onerous for lenders. Many already qualify borrowers at higher rates than those on which initial payments are based.
But some executives said the floor would become more of an issue if rates keep falling.
"I have a philosophical problem with the 7% floor," said Karl Mendenhall, a senior vice president at First Union Mortgage Corp., Charlotte, N.C. "I just don't like arbitrary floors and ceilings like that. They should have floating guidelines rather than something that's fixed."