Fixed-rate home loans may be staging a comeback, boosting the nation's mortgage banks.
Interest rates on the loans, tracking declines in long-term bond yields, have fallen to nearly 9% from 9.4% two months ago. At the same time, rising short-term rates have taken some of the shine off adjustable mortgages, which surged in popularity last year.
The result: Fixed loans are looking better to consumers every day.
Gary Gordon, an analyst at PaineWebber Inc., maintains that the loans will account for about 70% of originations nationwide this year, up from about 50% at the end of last year.
The shift is good news for mortgage banks because they generally specialize in fixed mortgages. Thrifts and banks, by contrast, often prefer to write adjustable mortgages, finding them a good fit for their portfolios.
"Fixed-rate business will continue and increase," said Rick Cossano, executive vice president at Countrywide Credit Industries, the nation's largest mortgage bank. "We anticipate our market share increasing."
It's not hard to see why fixed loans are on the rise. Three months ago, the average rate on the loans was a full 300 basis points above the initial rates of adjustables. As of last week, that spread had diminished to 228 basis points, according to HSH Associates, Butler, N.J.
Borrowers taking out adjustables today could, by next year, face resets leaving them with rates quite similar to today's fixed rates, experts point out.
To make fixed loans even more appetizing, some lenders are encouraging consumers to couple the loans with buydowns, which are higher up-front payments. The borrower ends up with a lower-than-usual rate for an initial period.
Barnett Mortgage Co., Jacksonville, Fla., did big business in adjustables in late 1994. Now, with rates changing, the company is preparing to jump on the fixed-rate band wagon.
"We trained our origination staff about benefits of a temporary buydown with fixed rates," said Don M. Lashbrook, executive vice president of Barnett.
Despite the new popularity of fixed loans, thrifts and other adjustable- rate lenders are by no means throwing in the towel.
Joe Bryant, executive vice president and chief mortgage officer at Long Island Savings, said adjustables still make up the majority of his business, and he does not see that changing.
With many forms of adjustables now available, "a certain segment of the population that is more sophisticated will go for those," Mr. Bryant said.