Even as the Federal Open Markets Committee raised interest rates 50 basis points Tuesday, some mortgage executives were saying that other concerns have displaced rates on their worry lists.
Rising rates over the last year have eliminated the incentive for most homeowners to refinance their loans, wiping out a big piece of the origination market. Many lenders were forced to lay off employees, sell to bigger companies, or close. Now these lenders are beginning to worry about their remaining stronghold - the home purchase market - which has held up well as refinancing dwindled. If they are worried about the Federal Reserve's action, it is not because rates are higher, they say, but because of the implications for consumer confidence.
"The real question," said Marangal I. Domingo, a senior vice president at Washington Mutual Inc. in Seattle, "is the psychology of the consumer, as opposed to where rates are." If consumers fear an economic slowdown is coming, he said, they might think twice about buying homes.
At the nation's largest mortgage originator, Chase Manhattan Mortgage Corp. of Edison, N.J., executive vice president Luke S. Hayden says he is more concerned about a dwindling supply of available housing than he is about rates.
"The change in short-term rates will not have a [direct] impact on the purchase market," Mr. Hayden said Tuesday before the Fed made its announcement. "What will have an impact is the available supply of housing."
According to the National Association of Realtors, 1.34 million existing homes were available for sale at the end of March - enough supply for three months to fill current demand, based on the pace of sales in March. By contrast, at the end of March 1999, the market boasted a 4.8-month supply of existing homes.
With fewer homes available, purchases will decline, leaving the mortgage industry with fewer loans to make, Mr. Hayden said.
The average rate on a 30-year fixed-rate mortgage Tuesday was 8.87%, the highest level since March 1995, according to HSH Associates of Butler, N.J. Mortgage rates have risen about half a point over the last 30 days in anticipation of the Fed's move Tuesday, said Melvin Steele, senior vice president of secondary operations at PNC Mortgage.
But that is less significant than it sounds for the purchase-loan market, because many lenders offer adjustable-rate mortgages that are priced cheaper than conventional fixed-rate loans, said Mr. Domingo at Washington Mutual.
"There are lower-cost financing alternatives available to [consumers] rather than just 30-year fixed-rate mortgages," said Mr. Domingo, who is also treasurer of Wamu, the fifth-largest home lender.
Still, not all lenders discount the threat from higher rates.
"Higher interest rates cannot help either affordability or mortgage lending," said Walter C. "Terry" Klein Jr., president and chief executive of First Nationwide Mortgage in Frederick, Md., the No. 17 originator.
Mr. Klein noted that in some cities, such as San Francisco, where his company's parent, California Federal Bank, is headquartered, house prices are so high that "it is a nightmare to seek a home." High home prices, combined with higher rates, put affordability out of reach for many consumers - which, Mr. Klein fears, could eventually hurt housing demand.
"Once you shut down the demand, you end up creating what I have seen as the boom-bust scenario [in which] suddenly you don't have enough buyers," he said. "I'm not foretelling a bust but I think it's going to self-correct, and it could be a painful self-correction."
Thomas S. Johnson, chief executive officer of Greenpoint Financial Corp. of New York, said the future of the purchase market depends on how much rising short-term rates affect long-term rates.
"One reason that the purchase market has remained strong is that the five rate hikes has not resulted in [equivalent] increases in the long end of the [Treasury yield] curve," Mr. Johnson said.
There are already some signs of slowing in the housing market. Tuesday the U.S. Commerce Department reported that housing starts increased 2.8% in April to a seasonally adjusted annual rate of 1.663 million, after falling to 1.618 million in March. However, much of April's gain came from multifamily construction; single-family home starts rose just 0.3%.
Mr. Steele of PNC was still optimistic. "Rates below 9% are still an attractive level for purchase money activity," he said.