Fed chief touts lending alternatives

By Sue Kirchoff and Barbara Hagenbaugh
USA Today

WASHINGTON — Federal Reserve Chairman Alan Greenspan said that Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.

In a speech yesterday at the Credit Union National Association meeting in Washington, D.C., Green-span also said U.S. household finances appeared generally sound, despite rising debt levels and bankruptcy filings. Low interest rates and surging home prices have given consumers flexibility to manage debt, he said.

"Overall, the household sector seems to be in good shape," Greenspan said.

Americans have been buying homes and refinancing mortgages at a record pace in the past several years, lured by low interest rates. Most mortgages are fixed rate, so consumers can prepay when rates go down but do not face higher costs if rates rise. Under adjustable-rate mortgages, which made up about 28 percent of mortgages in January, borrowers usually have lower initial rates but face the risk of higher payments if rates rise in the broader economy.

While borrowers can refinance fixed-rate mortgages, Greenspan said homeowners were paying as much as 0.5 to 1.2 percentage points for that right and the protection against a potential rate rise, which could increase annual after-tax payments by several thousand dollars.

He said a Fed study suggested many homeowners could have saved tens of thousands of dollars in the past decade with adjustable-rate mortgages. The savings would not have been realized, however, had interest rates shot up.

"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," Greenspan said.

Joseph McKenzie, deputy chief economist at the Federal Housing Finance Board, says buyers like the stability of fixed-rate mortgages, but there is increasing flexibility in products. "There are lots of innovative programs, especially targeting low-income and first-time buyers," he says.

The Mortgage Bankers Association said the average rate for a 30-year fixed mortgage in the week ended Feb. 13 was 5.46 percent, compared with 3.27 percent for a one-year adjustable-rate mortgage. Mark Zandi of Economy .com says for some borrowers, including those with high debt, fixed-rate mortgages may be a better bet.