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Spurred by Fed, Lenders Cut Rates on Fixed Mortgages : Finance: But cost of adjustable-rate loans goes up, making them less attractive to new home buyers.

August 18, 1994|KATHY M. KRISTOF | TIMES STAFF WRITER

Major lenders nationwide, reacting to the Federal Reserve Board's latest move to tighten credit, cut rates on their fixed mortgages Wednesday while raising rates on adjustable loans.

The moves, which make fixed-rate mortgages more attractive to new home buyers and to those refinancing their loans, could trigger a resurgence in the fixed-mortgage market, which had recently begun to lose ground to adjustable-rate loans.

"Fixed rates have definitely gotten more attractive in just the past week," said Earl Peattie, president of Mortgage News Co. in Santa Ana. "If you're going to spend some time in the same home, a fixed-rate mortgage looks increasingly viable."

Consider what happened at San Francisco-based Wells Fargo Bank. On Wednesday, Wells Fargo cut the rate on its fixed-rate loan to 8.5% from 8.65%. But it hiked charges for a popular adjustable loan product--the so-called one-year, T-bill ARM--dramatically. The initial rate on this loan soared to 6.75% from 6.25% the day before.

Such a narrowing of the "spread" between fixed and adjustable rates could--if sustained--reverse the trend that caused adjustable loans to surge in popularity during the first several months of 1994. Adjustable mortgages snapped up more than 40% of the market by the end of May, compared to 25% of the market in December. Fixed loans, forever the darling of home finance, still account for about 57% of the loans originated.

The rising popularity of adjustable loans was spurred when fixed loan rates started to rise at the beginning of the year. Adjustable loan rates rose too, but not as steeply.

The result: The spread between fixed and adjustable loans hit an all-time high in April, with rates on ARMs 3.45 percentage points lower, on average, than rates on comparable fixed-rate loans.

But as of Wednesday, that trend appeared to be put in reverse as lenders cut charges for fixed loans and either held the line on ARM rates or boosted them dramatically. At Countrywide Credit, a Pasadena-based mortgage banking firm, fixed mortgage rates dropped a quarter of a percentage point to 8.65% from 8.875%, while ARM rates stayed constant. Home Savings of America and Great Western Bank, two of the nation's biggest thrifts, cut interest charges on their 30-year fixed-rate loans by 10 basis points--or a tenth of one percentage point.

Neither thrift has yet boosted ARM rates, but such hikes are being considered.

Nationally, average fixed mortgage rates slipped Wednesday to 8.75% from 8.79% the week before, while adjustable loans climbed to 5.81% from 5.76% the previous week.

Why wouldn't rates on both types of mortgages go in the same direction at the same time? Because adjustable loan rates are affected by swings in short-term interest rates; they're frequently tied to one-year Treasury bills.

But fixed mortgages move in concert with the long-term bond market, which is swayed by inflation fears more than current interest rates. And the Fed's strong interest rate boost, which caused banks' prime rates to soar to 7.75% from 7.25%, soothed inflation fears that had been building since the economy began to gain steam in January.

"The silver lining in all this is that the market is very impressed with how aggressively the Fed raised rates," said Gary Schlossberg, senior economist with Wells Fargo Bank. "And that's increased the Fed's inflation-fighting credentials."

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