Banks are Raising Mortgage Loan Limits

Banks, looking to squeeze as much as they can out of the real estate boom, are upping loan limits for the typical consumer mortgage ahead of their traditional schedule.

The move is taking place in so-called conforming loans, where banks take their cue on lending terms from Fannie Mae, the federally sponsored mortgage giant. But banks have decided not to wait for Fannie Mae this year.

"A lot of lenders are sending out letters stating that they are going to start accepting loans at higher loan limits well ahead of the Fannie Mae announcement," said Bob Moulton, President of Americana Mortgage in Manhasset, New York. It's a move he says he hasn't seen in his 25 years of business.

Conforming loans are loans below a set amount that Fannie Mae will back, making them easier to buy and sell on the secondary market. Any amount above the conforming loan limit is considered a jumbo loan and typically carries an interest rate that is 25 to 50 basis points higher than a conforming loan. This is equivalent to an increase of anywhere from 0.25 percent to 0.5 percent above the rates for conforming loans.

Each year Fannie Mae reviews Federal Housing Finance Board (FHFB) statistics for the period stretching from October to October to determine what changes should be made to the limit. Typically, they will increase the conforming loan limit in relation to the average national home price. According to the National Association of Realtors (NAR), the national median existing-home price for August of this year was $220,000, up from $218,000 in July. The changes in loan limits are announced at the end of November and take effect in January. The current limit has been $359,650 since January of this year.

However, as a result of strong home sales, it seems many lending institutions are jumping ahead of the November announcement. Countrywide Financial has already increased its conforming loan amount to $400,000, as has lender, Quicken Loans. Bank of America confirms that it too, has increased its limit but would not give specific numbers. Though Chief Economist at Quicken Loans, Bob Walters, argues that this development is standard, Julie Davis, Spokesperson for Bank of America states, "This is the first time we have pre-empted the January deadline."

Sandy Cutts, a spokesperson at Fannie Mae says that the mortgage backer hasn't tipped its hand, either. "We have not given the banks any indication that this is the level we'll raise the conforming rate to." If the banks' estimates are right and the limit does go to $400,000, it will be an increase of 11 percent.

Walters believes that lending institutions like Quicken Loans, try to estimate what the increase will be, in order to gain a competitive edge. "Lenders seem a bit more aggressive and are taking the loans a bit earlier," Bob Moulton agrees, "It seems as if they are trying to buck for position." According to Senior Financial Analyst, Greg McBride at Bankrate.com, "This is one of the many different tactics businesses are using to get in on the hot housing market. Lenders are grappling with what they can do to keep people coming to the market."

By pre-empting Fannie Mae and Freddie Mac, banks are taking on a small risk while consumers get the benefit. If Fannie Mae does not increase the conforming loan rate to the level that lenders are expecting, the lenders risk having to hold those loans on their balance sheets or having to sell them to the secondary market at a reduced price. "It's a fairly insignificant risk," notes McBride.

Consumers however, stand to get a huge benefit from this move. As a result of the steps banks are taking now, consumers wont have to use a piggyback loan, pay PMI or get into a jumbo product in order to meet the high prices across the country. "You can get a $380,000 loan today, on a conforming first loan rather than having to use a combination of creative financing and high jumbo loan rates to purchase a home. It's a very positive situation from the borrower's perspective."

Long-term rates at highest level in 15 months

Freddie Mac said that long-term rates are at the highest level in 15 months, and the one-year, Treasury-indexed adjustable rate is at its highest level since July 2002 in the week ending Thursday. The benchmark 30-year fixed-rate mortgage average rose to 6.1% from 6.03% a week ago. The mortgage agency said its weekly survey also showed a rise in the 15-year loan, to 5.65% from 5.62%, and the one-year ARM, which averaged 4.89% vs. 4.85% a week earlier. The five-year hybrid ARM also rose, to 5.59% from 5.57% a week ago. "Despite the gradual rise in mortgage rates over the last two months, housing starts were actually up in September highlighting the resiliency of the housing market," said Frank Nothaft, Freddie Mac vice president and chief economist, in a statement.

Housing starts strengthen in Sept.

Construction of new homes in the United States reaccelerated in September, climbing 3.4% to seasonally adjusted annualized rate of 2.108 million, the Commerce Department estimated Tuesday.

Estimated housing starts were at the highest level since February, and exceeded the 1.970 million annual pace expected by economists surveyed.

Building permits issued by local jurisdictions increased 2.4% in September to a seasonally adjusted annual rate of 2.189 million, the highest in 32 years.

Starts of single-family homes rose 2.6% to 1.747 million, while single-family building permits increased 4.4% to a record 1.749 million.

Despite the disruption of two massive hurricanes, housing starts grew 6.9% in the South to 981,000. Starts increased by 1.9% in the Midwest and were flat in the Northeast and West.

Continued low mortgage rates and strong price appreciation have kept the housing market hot this year. Industry groups are estimating another banner year for construction and sales, although some anecdotal reports indicate that some local markets are cooling.

On Monday, the National Association of Home Builders and Wells Fargo said their monthly housing market index rose to 67 in October from 65 in September, restoring the level of confidence that existed before Hurricane Katrina hit.

Sales data for September will be released next week.

The government's housing data are subject to large sampling and other statistical errors.

The government cautions that it can take up to five months for a new trend to be established in housing starts. Over the past five months, starts have averaged 2.063 million, up from 2.047 million a month ago.

Housing starts have been above 2 million for six months in a row and for 10 of the past 12 months.

In 2004, a total of 1.956 million units were started.

Housing Starts Edge Down in August, Maintain Robust Pace

The pace of new-home construction edged down slightly in August, but remained at a seasonally adjusted annual rate above 2 million units for the fifth month in a row, according to government figures released recently. The Commerce Department indicated that the effect of Hurricane Katrina on the August housing report was “minimal.”

Total housing starts dipped 1.3 percent for the month to a seasonally adjusted annual rate of 2.009 million units, following a downward revision to the July rate. This was 0.8 percent below the pace of a year ago.

The pace of single-family home construction edged up a slight 0.1 percent to 1.709 million units for the month. This was 1.2 percent above the pace of a year ago.

Multifamily housing starts were down 8.5 percent for the month to a seasonally adjusted annual pace of 300,000 units. This was 10.7 percent below the pace of a year ago.

Housing starts increased in the West by 13.3 percent, but the three other regions reported declines in new construction activity in August. Total starts in the Northeast dipped 4.1 percent, the Midwest was down 5.2 percent and the South, which had unusually wet weather prior to Katrina, decreased by 6.6 percent.

Issuance of total building permits decreased 2.2 percent to a seasonably adjusted rate of 2.124 million units for the month. Single-family permit issuance dipped 1.3 percent and multifamily permit issuance was down 5.5 percent.

Realtors sued over policies

The Feds must not have been impressed by Realtor promises not to restrict Internet home sales listings.

The Department of Justice is suing the Washington, D.C.-based National Association of Realtors for what it says are anti-competitive moves.

This week, the National Association of Realtors, which represents more than 1 million agents, said it would enact new rules requiring its members not to restrict use of their Internet home listings.

Some traditional agents want the Realtors' association to allow them to block their listings from being marketed by Internet-based real estate sales firms, which have been growing over the last few years.

Others didn't like the idea of agents up the street putting listings on competing Web sites.

The association gave the Realtor-owned multiple listing services around the country until next July to change any restrictive policies.

But the Department of Justice – which sued the Realtors on Thursday – said the industry moves don't go far enough to protect consumers from anti-competitive moves.

The Realtors' new policy still allows brokers to discriminate against competitors who post listings online, said J. Bruce McDonald, deputy assistant attorney general in the Justice Department's antitrust division.

"The purchase of a home is one of the most significant financial decisions a family can make, and NAR's policy stifles competition," Mr. McDonald said. "Consumers benefit when real estate brokers are free to compete vigorously by offering innovative services."

Officials with the Realtors' association said the government's action is unwarranted.

"After months of negotiations, we are at a loss to understand why the Department of Justice would bring a legal action," the trade organization said in a statement. "Many of the changes incorporated in the new policy are in direct response to concerns they have raised over the course of the two-year investigation."

A spokesperson for ForSale ByOwner.com, one of the largest Internet home sales companies, on Friday called the federal suit "a major setback for the powerful real estate lobby."

Justice Department officials maintain that since the Internet can be used to deliver brokerage services more efficiently and cheaply, "brokers who utilize the Internet represent a competitive challenge to traditional brokers."

The government has aggressively pursued actions it considers anti-competitive against agents in several states.

The Associated Press contributed to this report.

How some nontraditional mortgages work

Interest Only:

The homeowner must only pay the interest on the mortgage for a certain number of years. After that, a homeowner either has to pay the loan off completely or begin paying on principal and interest each month. If the interest rate on the loan goes up, the monthly payment of both principal and interest may be too much for the homeowner to handle. If the value of the house falls, the homeowner may be stuck owing more on the loan than the house is worth.

Generally speaking, interest-only home loans are suited for borrowers who expect their incomes to rise quickly in the future.

Option Adjustable-rate mortgage:

A homeowner can decide how much to pay from month to month. One of the options can be a minimum payment that does not cover the full amount of interest that is due that month. The unpaid interest is added to the loan balance. If too much interest is deferred, it could be overwhelming because the borrower will be paying interest on a higher loan amount. If house prices fall, the homeowner could end up owing more than the value of the house.

Option arms can make sense for sophisticated borrowers who are financially sound but have lumpy incomes from month to month, such as people who rely on commissions or bonuses.

Piggy back mortgages:

A second loan is stacked on top of the primary mortgage loan. Experts say one of the primary reasons for going this route is to avoid paying private mortgage insurance. Traditionally, homeowners who put less than 20 percent down on a property have to pay for the private insurance. The interest on the second loan is tax deductible. The payments for private mortgage insurance are not. One other reason to piggy back loans is to avoid paying the higher rates that come with jumbo mortgages of $359,650 and up.

Experts say it is possible to combine two or even three mortgages so that no down payment is made. Borrowing 100 percent of the value of the home can be risky if interest rates rise or the value of the house drops.

40-year fixed rate mortgages:

By stretching out payments over 40 years, a homeowner would have a smaller monthly payment. But interest expenses over the life of the loan is going to be more expensive than a traditional 30-year-fixed rate mortgage. The homeowner also will be building equity more slowly with the 40-year loan.

Greenspan Warns Of Perils Of Risky Mortgages

Federal Reserve Chairman Alan Greenspan is turning up the volume on his warnings about the potential perils of certain risky mortgages if the high-flying housing market loses significant altitude.

There are signs some companies are getting the message. A few have begun scaling back some types of those mortgages or making them less appealing by raising costs.

Greenspan mostly is worried about homeowners who took out an interest-only mortgage or option adjustable-rate mortgages to buy property they otherwise could not afford. Borrowers and lenders holding such loans could get clobbered if housing prices drop or interest rates rise.

“In the event of widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses,” Greenspan said recently.

Doug Duncan, chief economist at the Mortgage Bankers Association, said it's “not only Greenspan, but it is also the market” that is driving some changes.

“If you are going to make a loan, you either have to be able to hold it in your own portfolio or you have to have someone to sell it to,” Duncan said. As some investors demand a higher return for the risk they are taking, some companies may boost loan costs. “If you change the pricing, there's going to be fewer borrowers for which the loan will be viable,” Duncan said.

Interest-only mortgages require that the homeowner initially pay only the interest on the loan for a set period. Option ARMs gives the homeowner flexibility to decide how much to pay each month. One of the options is a minimum payment that covers only a portion of the monthly interest.

These mortgages are appealing to people who need cash for other expenses. But it also exposes them to far greater risk — if housing prices drop, their loan could be worth more than their property. If interest rates rise, their loan will become expensive to pay off.

The Mortgage Bankers Association estimates that interest-only loans accounted for 17 percent of the $1.225 trillion in home loans originated in the second half of 2004, the most recent period for which this information is available. Previously, the association did not break out these types of loans.

It does not have figures for option ARMs.

Banking regulators are monitoring the flurry of risky mortgages and plan to issue regulatory guidance to banks.

“The easier availability of first mortgages has helped many marginal borrowers obtain loans and it has helped banks sustain loan volume and profits,” said John Dugan, comptroller of the currency.

“But looser underwriting standards and the more widespread penetration of riskier mortgage products have raised questions about how these loans will fare in the event of a rise in interest rates or a softening in house prices,” Dugan said.

Though there are signs of cooling, home sales still are on pace for a fifth straight record yearly increase, powered by low interest rates. Meantime, prices have skyrocketed.

The average home price soared by 13.43 percent during the 12 months ending June, the biggest gain in more than a quarter-century, according to the Office of Federal Housing Enterprise Oversight.

Nevada had the biggest increase, 28.13 percent, followed by Arizona, 27.82; Hawaii, 25.92; California, 25.16; and Florida, 24.45.

Greenspan has warned homeowners, lenders and investors that they should not count on similar increases. “History has not dealt kindly” with that kind of optimism, he said in August.

When the housing boom simmers down, prices will not rise nearly as much and could fall in some markets, he said.

New Century Financial Corp. is reducing the number of interest-only mortgages it issues to 25 percent during the second half of this year from 33 percent in the first half. It does not offer option ARMs.

A lessened appetite for these loans among investors in the secondary mortgage market was a driving factor behind the decision. In the secondary market, loans are purchased from banks and other lenders, pooled together, then sold to investors around the world.

H&R Block's Option One Mortgage raised the rates to brokers on all its mortgage products, including interest-only loans, by four-tenths of a percentage point. The boost was needed in part because profit margins had gotten extremely tight, spokesman David Gunasegaram said.

The company does not have plans to reduce interest-only mortgages. They accounted for 13.2 percent of mortgages granted to consumers through its retail business in the May-through-July quarter and 24.5 percent sold to brokers through its wholesale business. The mortgage lender does not offer option ARMs.

At Wells Fargo, interest-only mortgages so far this year make up about 25 percent of the mortgages it originates. It does not provide option ARMs. There are no plans to trim interest-only loans.

“We'll monitor the volume. We'll monitor the credit quality and as long as everything looks good we'll continue to offer it,” said Greg Gwizdz, executive vice president and retail national sales manager for Wells Fargo Home Mortgage.

For prospective home buyers, there are a multitude of financing choices. That means it is more important then ever to do homework, ask questions and figure out what you can truly afford and be comfortable paying.

Lenders say they lay out to customers the risks and benefits of interest-only as well as other types of mortgages.

“In the end, we are here to provide a service,” Gwizdz said. “If the customer really wants it, we are going to give it to them. Keep in mind we do have our credit guidelines. So the person will still have to qualify, will still have to have the down payment and the proper credit scores, the proper income and everything else.”

Home Building Cools A Bit as Mortgage Rates Rise

On Thursday, Freddie Mac reported in its weekly survey that 30-year, fixed-rate mortgages topped 6 percent for the first time since March. The popular home financing rate rose to 6.03 percent, increasing for the fifth consecutive week.

But even as borrowing rates rise, fears aren't surfacing about the bottom falling out of the local housing market. Unlike the late 1980s, when prices plunged, overbuilding has not occurred. And construction is already being constrained by the high cost of land, a lack of suitable sites and tougher zoning regulations.

"We're still posting healthy levels of growth, but we can't sustain the lofty levels of 2003 and 2004," said Donald L. Klepper-Smith, an economist at DataCore Partners in New Haven. He expects the 30-year home loan rate to rise "gently," perhaps to between 6.5 and 7 percent by the end of 2006.

Economists have long forecast that the 30-year home loan rate will rise and remain above 6 percent after hitting historic lows in 2003. So far, that has not happened, allowing buyers to purchase more expensive homes, fueling surges in home prices, in Connecticut and nationally.

Economists said mortgage rates are now rising because financial markets are worried about inflation, particularly in the wake of Hurricane Katrina. The Federal Reserve last month decided to raise a key short-term interest rate, saying it is worried about inflation caused by surging energy prices.

A growing number of manufacturers are being forced to raise the prices they charge their distributors and customers, unable to absorb the higher costs of gasoline, natural gas and oil. That's significant because manufacturers have refrained from raising prices because they face intense global competition. It's also a sign that inflation, an overall increase in prices, is stirring.

Even before the recent concerns about inflation, housing construction in Connecticut was showing some signs of slowing as demand appeared to be topping out.

"I don't think mortgage rates are going to increase so drastically that we are going to see demand collapse," Ugalde said.

Ugalde, president of T&M Building Cos. in Torrington, said buyers have yet to cut back on "extras" such as bonus rooms over garages, or upgrades such as granite kitchen countertops. That would be the first sign that borrowing costs are cutting significantly into the total price and monthly mortgage payment a buyer can afford, Ugalde said.

Concerns, however, are beginning to surface about home price appreciation in Connecticut outstripping gains in income in many parts of the state.

Klepper-Smith said rising home prices have the potential to price an increasing number of people out of the housing market.

Rising mortgage rates may take some air out of the housing bubble

Hear that hiss? That may be the sound of air starting to come out of the housing bubble.

On Thursday, a survey of housing lenders showed that the rate on 30-year mortgages rose above 6 percent for the first time since March. While it's bounced above that psychologically important threshold a few times in the last year, only to drop back, analysts say this time the direction looks to be headed in one direction – higher.

For prospective homebuyers, that means bidding adieu to rates that hadn't been seen since the president was named Eisenhower and Elvis' music was hitting airwaves for the first time. And these increased borrowing costs are likely to put a brake on the bidding wars that have stoked astounding housing gains and may even slow consumer spending that has fueled economic growth.

Realtors are already reporting a decline in demand. "It is going to definitely cause more of a slowdown," said Brenda Binczewski, a realtor at Carlson GMAC Real Estate in Palmer, Mass., who said she has seen a drop in business since July and has not had multiple offers for a home in three or four months.

In raising the overnight bank lending rate last month a quarter point to 3.75 percent, Federal Reserve policy makers expressed their concerns about inflation. And earlier this week, meeting minutes from those Fed officials hinted at more interest rate increases.

These concerns have been noticed in the broader financial markets, especially the U.S. Treasury securities market where interest rates have risen, tugging mortgage rates with them.

According to Freddie Mac, the U.S. housing agency which sells guarantees for home loans, this week's 6.03 percent average for 30-year mortgages is the second highest level of the year. Thirty-year rates were at 6.04 percent in the week of March 3.

"The most likely pattern is for mortgage rates to gradually rise over time," said Frank Nothaft, chief economist at Freddie Mac. He added that "will translate into somewhat weaker demand for housing, lower home sales volume and lower house price growth."

Douglas Duncan, chief economist at the Mortgage Bankers Association, an industry trade group said that "because of increased concerns about inflationary pressures, it will stay above 6 percent."

Low mortgage rates have supported consumer spending on goods and services – which accounts for two-thirds of the nation's gross domestic product – because low borrowing costs allowed home owners to draw money from properties that had appreciated in value.

Also, the steady rise in the cost of money is sure to limit home price appreciation because buyers won't be able to as readily bid up prices on homes for sale.

Freddie Mac's Nothaft pointed out that he does not expect a sharp drop in home prices or home sales because the rise in mortgage rates has been gradual. "It would be different if we had a spike in mortgage rates," said Nothaft.

Duncan noted that some home buyers may resort to adjustable rate mortgages (ARMs) which initially have lower borrowing costs.

"As fixed rates rise, ARMs will become a bigger factor," said Stephen LaDue, president of Affiliated Mortgage of Wauwatosa, Wisconsin. "The rate of increase in home values will slow or will start to stagnate," he said.

But that holds risks down the road for buyers. In its survey, Freddie Mac found that adjustable rate mortgages, which are linked to one-year Treasury rates, were offered at 4.85 percent this week, up from 4.77 percent a week ago and 4.01 percent 12 months ago. Further interest rate increases by the Federal Reserve, which are expected, probably will push ARM rates even higher, analysts said.

At the same time, a few consumers prospecting for properties – especially those prequalified by lenders – may be spurred into action by the rising interest rates.

"People may start buying before it (the mortgage rate) goes up any more," Binczewksi said. "They would make offers because they have rate locks. Now, with rates increasing, they won't want to lose rate locks."

Associated Press Economics Writer Martin Crutsinger in Washington, D.C., contributed to this report.

Rising mortgage rates: What's a buyer to do?

For perspective on recent increases in mortgage rates, it's instructive to chat with folks who bought a home in 1982.

"Sonny," they'll say, "we paid 15% on a 30-year mortgage and were glad to get it. Now stop whining. It's time for Wheel of Fortune."

Still, it's hard not to feel just a little twitchy about mortgage rates. The average rate for a 30-year, fixed-rate mortgage rose to 5.98% last week, a six-month high, according to mortgage giant Freddie Mac. That's still low by historic standards. But in some high-cost regions, even a small increase in mortgage rates could price some borrowers out of the market.

Other rates are edging higher, too. Rates on one-year, adjustable-rate mortgages averaged 4.77%, the highest since May 2002. The average rate for a five-year, hybrid adjustable-rate mortgage rose to 5.48% last week, a six-month high. Hybrid ARMs offer a low fixed rate for a set number of years before adjusting.

So what's a potential borrower to do? Smart moves to make now:

• Remain calm. Economists expect rates on 30-year, fixed mortgages to hover around 6% for the rest of the year, so if you're in the market for a home, you've still got time to look around. Bob Walters, chief economist for Quicken Loans, says borrowers who lock in sooner rather than later will probably be rewarded but says there's no need to panic. "If you have to wait six months, it's not like interest rates will be 8%," he says.

• If you're in the market for a large mortgage, look for lenders that have raised their borrowing limits for conforming loans. Rates on conforming loans, which are loans that lenders can sell to Fannie Mae and Freddie Mac, are a quarter to three-quarters of a percentage point lower than those for jumbo loans.

Every year, Fannie and Freddie adjust the limit for conforming loans to reflect home values. Because of skyrocketing home prices, analysts believe they'll raise the limit to about $400,000 for 2006, up more than 11% from the 2005 limit of $359,650. Fannie and Freddie repackage the loans as securities and sell them to investors.

The new threshold for conforming loans won't take effect until January, but some lenders have already raised their limits in anticipation of the increase. Quicken Loans expects to raise its limit in the next week or so, Walters says. National City Mortgage raised its ceiling for conforming loans to $400,000 in August, says Paul Thomas, executive vice president of secondary marketing. Increasing the limit will save borrowers who borrow up to the new limit about a quarter of a percentage point, Thomas says.

So if you're in the market for a $400,000 loan — and in some parts of California, that will buy you a one-bedroom condo next to a power plant — looking for a lender with a higher conforming-loan limit could save you money. Of course, that's just one thing you should consider when loan shopping: In a competitive market, many factors, such as closing costs and title insurance, may reduce your costs.

• Don't take big risks to lower your rate. Adjustable-rate mortgages don't reduce your monthly payment much now. On a $200,000 mortgage, for example, a five-year, hybrid ARM would save you about $60 a month over a fixed-rate loan.

The narrow spread may drive some desperate borrowers to take loans with low initial "teaser" rates and several payment alternatives. With these loans, borrowers have the option of making interest-only payments or a minimum payment that's even lower.

These types of mortgages provide a useful cash-management tool for sophisticated borrowers. But if you're using an option ARM to buy a house you couldn't afford with a conventional mortgage, "You're putting yourself at risk," says Anthony Hsieh, president of LendingTree.com. Eventually, you'll be required to pay both the interest and the principal, and your payment could spike much higher.

The narrowing difference between adjustable and long-term mortgages has dampened enthusiasm for ARMs. Last week, they accounted for 29.8% of mortgages, vs. 34% in December 2004, according to the Mortgage Bankers Association.

To protect themselves from rising rates, many borrowers with loans that are close to adjusting are refinancing to fixed-rate loans, Walters says.

Still, hybrid ARMs remain popular with borrowers who don't plan to stay in their homes for very long, Thomas says. While the difference between rates on hybrid ARMs and fixed mortgages is narrow, the lower hybrid rate "is still an incremental benefit" for borrowers, he says. "If they feel like they've got a shorter time horizon in the home, it makes a lot of sense."

Student loans: schooling stays with you

University prices have escalated rapidly in recent years, with some private schools besting $40,000 a year for education, room and board. With prices like these, it's little surprise that student loans are also on the rise.

During 2002, more than 11 million student loans were made, and Sallie Mae reports that 61 percent of students depended on federal loans to get their bachelor's degrees.

Since 1997, the median in undergrad debt has soared 74 percent to $16,500, according to a 2002 Nellie Mae report, the most recent available.

Grad students have also faced off with higher debts, facing a 72 percent increase in their median debt levels, to $23,700 over the period from 1997 to 2002.

About the only thing looking good for students are the interest rates, which have kept payments lower than they might otherwise be -- $182 in 2002 compared to $161 in 1997.

With the Federal Reserve indicating that its upward march of interest rates won't be ending any time soon, the unique debt situation may not last long.

"The raises in interest rates will reduce the willingness and ability of consumers to continue their pace of borrowing," said Hoyt. "This is both directly -- through the cost of debt -- and indirectly -- because it's likely to slow house price appreciation."

Rising interest rates will soon make debt look a lot less attractive -- and induce consumers to initiate a technique that's been little-seen in recent years -- saving.

Auto loans: cars drive debt

Americans have been upgrading automobiles at an impressive clip in 2005. July sales climbed to 20.8 million units on an annualized basis, a sales rate not seen since 1986.

And auto loan maturities are growing in order to make payments more affordable. 88 percent of new car loans are now longer than 48 months, up from 85 percent a year ago, according to the Consumer Bankers Association. 45 percent of loans mature in over 60 months.

But auto loans look to shrink as a percentage of household debt in the near term because of slumping auto sales after Katrina.

New vehicle delinquencies declined 18 percent in 2004, and used vehicle delinquencies fell by 3 percent, according to the CBA.

Credit cards: putting it on plastic

Americans' love affair with credit cards has continued unabated recently, with the average credit card debt per household reaching a record $9312 in 2004. That's up a whopping 116 percent over the past 10 years.

And it's expensive debt too: average annual percentage rates (APRs) for September rose to 11.84 percent, compared to 11.56 percent a month earlier.

Americans paid over $127 billion in household bills on credit and debit cards last year, and that number is predicted to top $161 billion in 2005, according to CardWeb.com.

Many households have far more plastic than you could fit in a wallet. The average number of bank cards per cardholding household is 19.3 -- typically eight bank cards, eight retail cards and three debit cards.

Bank card delinquencies reached an all-time high in the past quarter, according to ConsumerFlow.com, with 4.81% of accounts missing minimum payments. The Web site's analysts attribute the increase to high energy prices as well as changes making it more difficult to file for personal -- or Chapter 7 -- bankruptcies.

But consumers have seen better interest rates elsewhere, and are increasingly using home refinancing and other fixed rate vehicles.

"They're moving away from bank cards and credit cards -- short-term installment debt -- into various forms of mortgage borrowing with lower interest rates and long terms," said Hoyt.

Debt: consumers juggle big burden

The American consumer has long enjoyed a healthy dose of borrowing, but the sustained low interest rates of recent years have launched consumer debt to near-record levels.

The so-called financial obligations rate -- which measures minimum required debt payments as a percentage of disposable income -- rose to 18.4 percent in the second quarter. This is near the record of 18.8 percent in late 2001.

So the incomes of many American households are heavily tied up in monthly debt payments.

"Low interest rates and rampant house price appreciation have really been driving borrowing," said Scott Hoyt, Direct of Consumer Economics at Economy.com. "As long-term rates finally start to rise, the pace of debt accumulation will slow."

Freddie Mac's 30-year fixed-rate mortgage rate rose to an average 5.98 percent this week, and inflation fears could drive it even higher in weeks to come. In the year-ago period, the 30-year mortgage averaged 5.82 percent.

Mortgage borrowing continued its sustained climb, increasing 13.4 percent in the latest quarter -- its seventh consecutive quarter of growth.

Pending Home Sales Index Hits Record - NAR

Pending home sales have risen to a record level, defying some expectations of a cooling market, according to the National Association of Realtors(r).

The Pending Home Sales Index,(a) based on contracts signed in August, rose 3.2 percent to a reading of 129.5, and is 4.7 percent higher than August 2004. The previous record was 128.1 in October 2004.

The index, which is a leading indicator for the housing sector, is derived from pending sales of existing homes. A sale is described as pending when the contract has been signed but the transaction has not been finalized. Pending home sales typically close within one or two months of signing.

David Lereah, NAR's chief economist, said strong demand and favorable market conditions are driving home sales, but the cloud of Hurricane Katrina is hanging over some of the data. "Home sales remain at remarkable levels, but there is ambiguity regarding pending home sales in parts of the South since many transactions in the disaster zone will be postponed. It's unclear how much of that disruption may be offset by spiking sales in surrounding areas," he said. "Even so, national sales should stay close to record levels over the next two months and housing will continue to support the economy."

Direct data from many hard-hit areas will be unavailable until affected multiple listing services are restored to operation. An estimated 28,000 Realtors(r) lost homes and businesses in Katrina. The Realtors(r) Relief Foundation has collected nearly $4.8 million to provide emergency relief for hurricane victims. Funds are targeted for homeowners and affected NAR members alike. A Pending Home Sales Index of 100 is equal to the average level of contract activity during 2001, the first year to be analyzed, and was the first of four consecutive record years for existing- home sales. Sales in 2001 were fairly close to the higher volume of home sales expected in the coming decade, well above the levels that were seen in the mid-1990s, so an index of 100 is considered to be historically strong.

Regionally, the PHSI in the West rose 7.6 percent to 136.7 in August and was 8.7 percent higher than August 2004. The index in the Midwest increased 2.8 percent to a level of 119.4, and was 0.5 above a year ago. In the South, the index rose 2.2 percent to 142.1, and was 7.6 percent higher than August 2004. The Northeast index declined 0.5 percent to 108.5 in August, and was 2.2 percent lower than a year ago.

The National Association of Realtors(r), "The Voice for Real Estate," is America's largest trade association, representing more than 1 million members involved in all aspects of the residential and commercial real estate industries.

Note a: The Pending Home Sales Index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 closely parallels the level of closed existing-home sales in the following two months.

Existing-home sales for September will be released October 25; the next Pending Home Sales Index will be on Nov. 3.

Information about NAR is available at http://www.realtor.org. This and other news releases are posted in the Web site's "News Media" section in the NAR Media Center. Statistical data, charts and surveys also may be found in the NAR Media Center by clicking on Economic & Housing Statistics.

REALTOR(r) is a registered collective membership mark which may be used only by real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS(r) and subscribe to its strict Code of Ethics.

Minorities found to pay high mortgage rates

African-Americans are at least 2 1/2 times more likely than whites to receive a higher-cost mortgage or home loan refinancing last year, a national study found. Latinos were at least 1 1/2 times more likely than whites to get a costlier mortgage, according to the study, released yesterday by Association of Community Organization for Reform Now. The nonprofit group looked at lending practices in 125 American cities.

A high-cost loan was defined in the study as one with rates more than 3 percentage points above certain Treasury rates. Although the group did not factor in household income or consumer creditworthiness, either of which could influence a loan rate, the authors contend there is a large disparity connected to both race and geography.

"Right now, it says if you're a lender and you have disparate results, that's on you to find out where the problem is," said Valerie Coffin, a researcher who conducted the study. "Are there inherent problems in your underwriting system that you aren't aware of?"

Keith Foster, director of enforcement and compliance for the Fair Housing Center in Toledo, said the findings are a first step. More research is needed to determine if the appearance of discrimination is accurate and to what extent, he said.

"This is a cause for concern and red flag for us to find out what is behind that data and get to the bottom and find out whether it is really related to race or some other thing," he said.

In metro Toledo, the study found that one in every five total loans was a high-cost loan through a subprime lender, generally used by people with lower income and more risk of being unable to pay back the loan.

But, almost half the first-time mortgages to local blacks were high-cost loans, one-fourth of those to Latinos, and just one-fifth of those to whites, the study found. Also, buyers in minority neighborhoods were more than three times as likely as those in white neighborhoods to receive a high-cost loan.

The study used figures reported under the Home Mortgage Disclosure Act by 18 Toledo-area lenders. ACORN said those lenders made 2,516 first-time mortgages last year, with 153 going to African-Americans, 68 to Latinos, and 2,101 to whites. They also issued 1,289 refinanced loans, with 83 to African-Americans, 30 to Latinos, and 1,090 to whites.

Compared to other communities nationally, Toledo ranked 24th highest among metro areas with at least half of refinanced loans to blacks being high-cost. Toledo's rate was 53 percent. Dayton ranked first, with 69 percent of its refinancings to blacks as high-cost loans. Cleveland was fifth, with 65 percent.