Housing boom in U.S. linked to Asia crisis Mortgages below 7% can be traced to Asians buying U.S. securities; Loans may top $1.13 trillion

THE BALTIMORE SUN

Douglas and Christine Byerly typify what's been happening in this hectic housing market of 1998.

Last year, when they put their three-bedroom, one-bathroom duplex in Baltimore on the market, there was little interest and few would-be buyers. Maybe, they thought, the timing wasn't right. Ultimately, they became uninterested and allowed the listing agreement with their real estate agent to expire and put their hopes of buying a larger home on hold.

But it didn't take them long to get swept back into the market -- a market that has seen mortgage rates head lower and the fever for buying homes surge higher.

"We didn't even have our home on the market," said Mrs. Byerly, a neonatal nurse at the University of Maryland Medical Center. "Our [former] real estate agent called us and was showing a friend houses. He asked if he could show the house."

The agent showed the house, the buyer loved it and they wrote a contract right there. "It just sort of fell into our laps," added Mrs. Byerly, who is expecting her second child in the next few weeks -- about the same time they are to settle on the sale of their city home.

Fortunately, the Byerlys quickly found a four-bedroom house in Baltimore County, and when they went to make a mortgage application Tuesday they found another pleasant surprise -- an interest rate under 7 percent.

Little did the Byerlys know that the chaos of what was happening half a world away in the Asian financial markets would lower their monthly mortgage payments. In fact, they hit the market just right, at a time when the yield on the 30-year U.S. Treasury bill -- which influences mortgage rates -- was near an all-time low.

If they had bought a home in the spring of 1997, they would have had to settle for a mortgage in the 8 percent range. Last week they locked in a rate of 6.875 percent on a 30-year loan of $179,450. The lower interest rate means they'll save $138 a month in interest or almost $50,000 over a 30-year loan at 8 percent.

For many in the mortgage industry, the turmoil in the Far East has generated some of the lowest and steadiest interest rates in memory. And it has been a boon to consumers.

"When there is fear in the [global] marketplace the money pours into the [U.S.] Treasury market and the rates get better," said Peter Georgopoulos, president of Provident Mortgage Corp. "When that subsides and people take money out of that bond market and put it elsewhere, then those rates get higher and the mortgage rates go up."

As of Friday, Freddie Mac's national weekly survey of 30-year fixed-rate mortgages saw rates drop to 6.94 percent from the previous week's 7.04 percent. It was the lowest rate since Jan. 16, when troubles in the Asian market pushed the rate down to 6.89 percent.

In the Baltimore area, the rate for a 30-year fixed-rate mortgage also dipped a 10th of a percentage point from the previous week's 6.89 percent, according to the weekly survey of 40 area lenders by HSH Associates, a New Jersey firm that tracks and analyzes mortgage rates.

"We've had over 30 weeks of having 30-year fixed-mortgage rates below 7.25 percent. That is unprecedented in the 27 years we've done the survey," said Frank Nothaft, deputy chief economist at Freddie Mac. "These are clearly the best times we've seen."

Some in the industry say it may not be too far-fetched to see rates drift into the 6.5 percent range, depending on what happens a world away.

"It's possible if we see a continuation of this [Asian instability] that we'll see 30-year fixed-mortgage rates drift lower, to 6.75 and perhaps a little less," said Nothaft. "It's more likely in the near term to see 6.5 than 7.5, and I certainly think that 6.75 is very likely as an average rate. It's possible in the next couple of weeks that you will see that become more common."

Georgopoulos of Provident shares the same belief.

"Let's say that things don't get much better or actually get worse in the Far East, and all the economies slow down and all the money runs to a flight to quality [U.S. Treasury bonds], then rates will go down some more," he said.

"So it is absolutely within reason to think that you could go down a quarter of a [percentage] point to a half a point in interest rates by the year's end, if those economies don't do well."

Nothaft noted that rates for a brief time were lower in October 1993 when a massive refinancing wave swept the country. "But what's different this time around," he said, "is that we are enjoying lower rates for an extended period of time, longer than what we experienced in 1993."

Six-month mark

Others, such as Keith Gumbinger, vice president of HSH Associates, called the relative calm in the mortgage market "creepy."

"We rarely have this level of this stability for this long," Gumbinger said, citing his own survey numbers. "Last year interest rates -- with a 1 percent [movement] from top to bottom -- were the most stable for the last 10 years. So far -- and we are rapidly approaching the six-month mark -- our top for the year [nationally] was 7.28 and our low for the year was 7.05, a 23 basis-point spread. Unless the end of the year gets hairier, and it could, this would be unprecedented stability. We may be seeing stability that I haven't seen in my lifetime."

With fixed rates being so low, the demand for adjustable-rate mortgages (ARMs) has been practically wiped out.

Just 13 percent of all loan originations in April -- the latest statistics available -- were for ARM products, Nothaft said. This is far different than January 1995, when the Freddie Mac national survey reported rates of 9.15 percent and when ARMs made up almost 60 percent of loans. "It's a market dominated by fixed-rate lending and that's what consumers want. It's the loan of choice," Nothaft said.

Paying points

Theodore E. "Chip" Reichhart Jr., president of MNC Mortgage Corp., remembers quoting rates near 20 percent back in the early 1980s, "and the one thing I didn't think I'd see ever again was quoting rates this low."

And if by some chance a sales contract comes with the seller or a builder willing to pay points (a discount point is 1 percent of the loan amount that the lender charges to reduce a mortgage rate), buyers can depress the rate even further.

"It's always valuable if the seller is willing to pay a point, or part of the borrower's closing cost. That is what I would suggest a buyer to do," said Mitch McCloskey, the Provident Mortgage Corp. officer who helped the Byerlys get their loan. "See if the seller is willing to pay a point, then pay a point out of the buyer's own funds and get under 7 percent."

Neil Sweren, president of American Home Loan Inc. and past president of the Maryland Association of Mortgage Brokers, said it's "always smart" to try to get discount points paid by the seller.

Even lower

Sweren quoted rates as of Thursday at about 6.875 with 1 discount point. But with a total of 2 points, he said, the rate would drop to 6.625. "You will always get lower payment by getting more points and lower rate," he said.

Gumbinger was even more bullish, suggesting that fixed-rate mortgages -- which he said historically run about 3 percent over the inflation rate -- should be even lower today when taking into account the nation's almost invisible inflation rate.

"If inflation is at 2 percent or even 2.5 percent, you can easily argue for mortgage rates at 6 percent, even 5.5 percent," he said.

"But profitability, being what it needs to be, and lenders having absolutely no trouble selling product at this price . If you are a mortgage lender and you can sell product today at 7 percent and people are coming in the door in a steady stream, and you can make record profits doing that, where is your impetus to cut rates to get them through the door? It is not necessary to do that, so therefore you are not doing so.

"Until we see a slowdown for mortgage money, you probably will not see rates contract much. You can't fault them [lenders] for wanting to make money."

And making money they are. According to Freddie Mac, loan originations for conventional, FHA and VA loans are expected to reach $950 billion this year, $100 billion more than last year.

And in the first quarter, the quasi-government Freddie Mac, which supplies mortgage money to lenders, reported a profit of $393 million, a 12 percent increase over the same period last year. According to Mortgage Bankers Association of America estimates, originations will top $1.13 trillion, surpassing the $1.01 trillion of 1993.

Likewise, top executives are reaping higher salaries and bonuses. For instance, Angelo R. Mozilo, vice chairman of Countrywide Credit Industries, which operates the largest independent mortgage company, received $5 million in salary and bonuses in 1997, 22.8 percent more than 1996, according to a report in American Banker.

Locally, Reichhart said MNC Mortgage, which operates offices in 10 states, said he expects loan originations to top $2.4 billion. "It's been a great run for lenders as well as consumers," he said.

But the question remains, how long will mortgage rates remain this low and stable?

"If rates climb back up to 8 percent, you're going to hear screaming. And that's a huge psychological change," Gumbinger said. "Five years ago, people would have killed each other for 8 percent.

"Have we seen the best? We're at or near the best that we are likely to see. Hopefully, the party never ends but, unfortunately, almost all parties do."

Pub Date: 6/21/98

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