Mortgage lenders unveil plethora of new programs; rising interest rates cause refinance market to dry up.

Mortgage financing activity is increasing in Los Angeles County, according to several local lending institutions, as area lenders seek to counteract the chilling effects of rising interest rates by offering a range of new programs featuring low down payments, reduced fees and insurance, and higher loan limits.

As the refinancing boom dries up, home purchasers are shifting from fixed-rate to adjustable-rate mortgages (ARMs) in increasing numbers in an attempt to catch the affordable mortgage train before it steams out of sight.

There is greatly increased competition among lenders, particularly in the lower- and mid-priced housing markets, although the primary emphasis seems to be more on lenient terms than on lower price.

Cliff Collins, senior vice president and national director of sales for Home Savings of America, L.A. County's second-largest mortgage lender last year, said: "There has been a big increase in the percentage of purchase loans vs. refinances here (at Home Savings). Refinancing comprises about 43 percent of what we have in the pipeline and 34 percent of the new applications. We have also noticed a profound shift away from fixed to adjustable rate mortgages. Currently 90 percent of our applications are for ARMs; last year, 80 percent of loans industrywide were fixed."

ARMs have become much more popular of late because of the spurt in fixed-rate interest -- from an average low of 6.8 percent last fall for a 30-year mortgage to an average of 8.6 percent in mid-April. Home Savings has ARMs that start as low as 2.85 percent. On a $100,000 loan, the monthly payment for this 2.85-percent ARM would be $413, vs. $769 for an 8.5-percent fixed-rate mortgage -- a significant difference.

"More people can afford houses today, and people can also afford more house," Collins said. "In the past 60 days, some ARMs have seen increases in their rates of 50 or 60 basis points, because they are tied to the more volatile indexes, like the T-bill. Those tied to the more stable 11th District Cost of Funds Index (COFI), however, have continued to decline. Since the vast majority of our ARMs are tied to the COFI, we have been able to lower the rates on them, while we have seen our competitors raising the rates on their adjustable mortgages."

Fixed-rate loans have more-stringent qualifying criteria than ARMs, because they are packaged for sale into the secondary market. Many ARMs are issued by portfolio lenders and held for future income.

Another reason for home buyers' shift to ARMs and away from fixed is that many ARMs' lifetime interest rate caps are still under 10 percent -- and the difference between the 9.95-percent cap and the fixed-rate (currently about 8.5 percent) is now very small. A few months ago, some ARMs had caps in the 11-percent range and fixed-rate mortgages were at about 7 percent -- a more dramatic gap.

Collins explained: "Because you can now get an ARM at a lower starting rate and not see it rise much higher, and because many of them are tied to a relatively stable index that is currently going down, a lot more people are opting for adjustable rate mortgages.

"Our applications came in about $125 million-a-month faster in March than February. And so far in April, we are on a pace that's another $100 million higher. One reason the volume of applications is up, besides the lower rates, is that we have changed the parameters on some of the loan programs.

"We have tried to provide first-time buyers and move-up buyers a new loan program only requiring 5 percent down. Lots of lenders have 95-percent loans. But what's unique about ours is that it goes up to $300,000, rather than to the Fannie Mae (Federal National Mortgage Association) limit of $203,150 our competitors follow."

Home Savings' new 95-percent loans were introduced in February and are a big hit, Collins reported. Such loans now compromise 10 percent of the thrift's total residential mortgage loan volume for homes under $1 million, with about $195 million of such loans currently in the pipeline. Other big advantages of Home Savings' 95-percent loans: the 5-percent down payment can be a gift from a family member, and there is no PMI (mortgage insurance) required.

PMI is usually required on loans over 80 percent of the value of the property and can run as much as three-fourths of a point initial premium at closing, plus one-half a percent annually, paid monthly. Moreover, PMI has its own set of qualifying criteria that are typically more rigid than those required for getting the loan itself.

Collins added: "Our focus group research with the real estate brokerage community told us that lots of people have a good job and decent credit, but don't have the down payment. We think the 95-percent loan will significantly stimulate home buying activity."

Meanwhile, the volume of fixed-rate mortgages has dropped precipitously at area lenders. At Home Savings, the rising rate environment has not affected underwriting guidelines, but has inspired the lender to offer fixed-rate borrowers the option to lock in the prevailing interest rate for 10, 30 or 60 days -- commencing any time between the time of application and the time the loan closes.

Home Savings has joined with a group of real estate brokers, title companies and builders to create the American Dream Coalition, which hopes to stimulate home buying activity through a massive ad and P.R. campaign. This month, the group plans to host 350 seminars across California, addressing an estimated 10,000 first-time home buyers.

"We are noticing a real upsurge in home buying activity," Collins said. "The American Dream Coalition projected that 170,000 families in California are ready and able to buy a home, but have been sitting on the fence waiting for the right time to do it. The bump-up in interest rates has convinced many that this is the time, because rates have already bottomed. You usually have an upsurge in home buying activity when rates rise off a low level."

Home Savings currently has $300 million worth of advanced loan approvals in the pipeline -- people who have been approved but are still shopping for the house they want. That has gone up dramatically -- from about $50 million at this time last year.

The increase is a strong indicator that a lot of people are now serious about buying a home. There is much evidence that the L.A. County housing market is recovering at last from its long slumber.

There is still concern in the upper-end home market. But in the under-$300,000 range, listings are decreasing and there is a definite increase in offers and sales activity, Collins said.

Ernie Mortensen, first vice president and area manager at Great Western Bank, L.A.'s third-largest mortgage lender last year, said: "Considerably fewer people are coming in to refinance today; instead, they come in to purchase with a fixed-rate mortgage -- and end up getting an ARM. The purchase market is becoming much more hotly contested. Many lenders are going out offering low down payment programs, such as our 3-2 option (requiring a down payment of 3 percent of the borrower's own funds and allowing a 2-percent gift).

"A lot of lenders are doing zero-point loans or no-lender-fee loans (which typically have higher interest rates). I think the best value is always an 80-percent loan or less. But right now, the market wants lower-down-payment loans."

Mortensen added, "With the prices where they are in L.A., a lot of renters have talked to lenders and learned that they can actually buy a house with monthly installments lower than what they pay for rent. Our Community Home Buyers loan with the 3-2 option has been available since the beginning of the year; we have gotten a great deal of interest and foresee making a lot of these loans in 1994. We also offer a 90-percent loan with PMI that is either lender-paid or self-insured by the bank. The lender-paid PMI is tax deductible, whereas it is not if you pay it to the insurance company.

"We are starting to see a lot more first-time buyers. As the leader in low- and moderate-income neighborhood lending, we talk to a lot of lifetime renters who have saved for a house and think this is a good opportunity.

"Once that part of the market gets going, which it definitely is, that will help us with the move-up market," Mortensen said. "The L.A. housing recovery is not going to happen overnight, but it is starting to move again. I am much more optimistic than I was 12 months ago."

L.A.'s sixth-largest mortgage lender, First Interstate Bank, now has a hybrid fixed-adjustable program which offers a fixed rate for either three, five or seven years and then automatically rolls into a one-year adjustable to the end of the loan term -- up to 27 years. Interest rates on this loan currently run between 7 and 8 percent. Introduced a month ago, First Interstate's hybrid is getting an excellent response, reported Steven McGough, a First Interstate senior vice president and origination manager. "We now have a loan (program) that allows people who wouldn't have been able to qualify, to do so with 3 percent down," McGough said.

It actually requires 5 percent down, but the bank loans the home buyer 2 percent at two points below the First Trust Rate, which on April 22 stood at 7.75 percent for 15-year fixed-rate loans and at 8.375 percent for 30-year fixed-rate loans.

"This mortgage lending programs sets expanded, more-flexible underwriting guidelines than traditional loans," McGough added. More specifically, some advantages of the program include: no cash reserves required, fees reduced by 50 percent and a higher "back-end" ratio, he said. The back-end ratio is the percentage of a borrower's total obligations (mortgage and other debt) to income. Hence, allowing a higher back-end ratio means the lender is allowing the borrower to carry a higher level of indebtedness. By comparison, a front-end ratio refers to a borrower's degree of indebtedness before figuring in the mortgage debt for which the borrower is applying.

First Interstate had been selling its 3 percent-down loans to the secondary market since September 1992. But in January 1994, First Interstate began holding onto the loans in its own portfolio, which allowed the more-lenient terms.

When interest rates significantly accelerated in February, McGough said, he initially saw an increase in mortgage applications. But then, in March, that volume of loan applications dropped 20 percent below normal levels, primarily because demand for refinance loans plummeted. But that drop-off in refi loans has been somewhat offset by recent increases in home-purchase loan applications. In fact, First Interstate's volume of home-purchase loan applications in April was double its April 1993 volume of such applications, McGough reported.

He said: "We see a public watching the rates to see which way they will go. Some people think that rates might come down again. We feel that applications will increase as we go into the summer months, so this should be a very aggressive and healthy summer for home purchases.

"With the slowdown in applications, you have the same number of lenders going after a shrinking pie, creating healthy competitive pressure. We have responded by changing our underwriting and offering programs that may not be available to some of the mortgage brokers out there. And we, therefore, expect to do well in the coming competitive market."