Are Fixed-Rate Loans About To Vanish?

Are Fixed-Rate Loans About To Vanish?
Realty Trac - September 18, 2008
Peter G. Miller

For decades the surest and safest mortgage has been the quiet and dull fixed-rate loan. With fixed-rate loans the monthly payment for principal and interest never changes, the interest rate stays the same, the loan balance declines every month and the threat of payment shock is non-existent. The biggest choice faced by fixed-rate borrowers is 30 years or 15.

Given the mortgage calamities seen during the past year it might seem logical that lenders would be pushing fixed-rate mortgages, but the good things which make such loans safe and secure for borrowers are increasingly unattractive to mortgage investors, the people who actually buy loans. The result is that fixed-rate mortgages are about to become increasingly rare even for the best borrowers.

The Good Old Days

One of the first homes I bought was financed in a way that would make TV real estate wizards proud: I assumed a 6 percent mortgage and the seller took back a second loan at the same rate for much of the rest of the purchase price.

This was long, long ago and each month I went to the local bank and made my payment on the first mortgage. The teller would mark my passbook by hand and as corny as it seems I actually looked forward to my monthly trips to the bank and the gradual reduction of my debt.
The problem was that with every payment the lender lost money.

The lender, I have no doubt, hated me. Nothing personal, merely a reflection of the reality that while I was paying 6 percent the very same lender was making mortgage loans in the late 1970s and early 1980s at 12, 13 and 14 percent.

My lender was financing long-term mortgages such as mine with short-term borrowing. The interest rates paid by the lender were higher than my loan rate, so the lender was losing money with every payment I made.

“Today lenders have gotten smarter,” says James J. Saccacio, chief executive officer at RealtyTrac.com, the nation’s best known source of foreclosure data and listings. “Freely-assumable loans don’t exist and the companies we see as ‘lenders’ are most-often mortgage retailers, companies without a vault, deposits or cash of their own. For the past few years the game has been to originate loans, sell them as quickly as possible, and then use the cash from the sale of one loan to finance the next.

“While the system of selling loans has been good in the sense of adding liquidity to the marketplace,” said Sacaccio, “ultimately it’s unchanged from the days of passbook loans: In the end there’s an investor putting up the cash for a mortgage and that investor does not want to take a loss.”

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Are Fixed-Rate Loans About To Vanish?