Consumers shopping for a home loan should not expect an immediate cut in mortgage rates as a result of Thursday's discount rate reduction to 6% and should be prepared for continued long delays in processing loan applications, bank and savings and loan officials said.
Lenders have been flooded with requests for new mortgages and refinancings since early this year, when mortgage rates began a steep drop. Fixed-rate mortgages fell below 10% in April for the first time since 1978.
Since then, homeowners who borrowed at 14% or 16% a few years ago have stormed the doors of the nation's banks, thrifts and mortgage brokers hoping to cash in on the new, lower rates. The resulting swamp of applications led to processing backlogs that reached 10 weeks and longer. Lenders have added staff and worked nights and weekends to handle the paper-work flood.
Following the spring crush, lenders allowed rates to creep upward to cool the borrowing fever and ease the paper jam, a process one savings and loan executive described as "rationing."
"Mortgage rates have been artificially high because of the backlogging," said Anthony Frank, president of First Nationwide Savings & Loan Assn. in San Francisco. "I think it's a rationing device."
First Nationwide announced last week that it would no longer accept applications for fixed-rate mortgage loans. Great Western Savings in Beverly Hills, bragged in a press released that it had reduced its average mortgage processing delay to 41 days. A Great Western spokesman said the thrift had added nearly 100 loan agents this year, a 30% increase, to handle the record workload.
'Through the Python'
The refinancing frenzy has slowed somewhat in recent weeks, reducing the backlog. "The pig is passing through the python," Frank said.
Frank and other industry executives said mortgage rates would begin to fall moderately as lenders catch up on existing loan applications. Nearly all agreed that the Federal Reserve Board discount rate cut reflected trends in the marketplace and would not, in itself, spur lenders to cut their rates.
"The Fed does not capriciously cut its discount rate. It's a sign we'll see slow economic growth and moderate interest rates," said Jim Christian, aneconomist with the U.S. League for Savings Institutions, a trade group. "If you're a depositor, maybe that's not such good news. If you're a mortgage borrower, you're still going to face that backlog. But when you get to the window, you won't find the rate has gone up, and maybe it has come down a little."
Economist Jerry St. Dennis of California Federal Savings & Loan Assn., predicted that mortgage loan rates would drop slightly but would not reach the9.5% level that some lenders were offering in April.
"This will tend to lower both fixed rate and adjustable rate loans, although I think it's unlikely that fixed-rate loans will fall as low as they did in April," he said. "All of those worrying about whether home rates are going to come down, the answer is yes, they will, but not as much as they did the last time."
St. Dennis said rates would not return quickly to the 9.5% level because the so-called secondary market is still absorbing the huge volume of low-rate mortgages written in March and April. The secondary market consists of institutional investors and government agencies who buy huge blocks of mortgage loans from lenders around the country to take advantage of their relatively high yields and to provide a flow of money to fund fresh loans.
Other consumer loan rates also will likely continue a slow downward trend, but with no immediate or dramatic reductions, economists and bankers predicted. Automobile loans have been getting cheaper because of cut-rate financing offered by manufacturers, while home-equity and unsecured consumer loans have remained several percentage points higher than mortgage rates.
Credit card interest rates, following their unique logic, continue to average about 18% annually nationwide. Lenders say those rates reflect earlier heavy losses and high administration costs and do not respond to market forces.