In a rare evaluation of the interest-rate options that households face, Federal Reserve Chairman Alan Greenspan questioned whether American homeowners are well-served by popular fixed-rate long-term mortgages.

"American homeowners clearly like the certainty of fixed mortgage payments," Mr. Greenspan said in a speech to the Credit Union National Association in Washington.

Fixed-rate mortgages protect against higher rates while offering the option of refinancing should rates drop. But homeowners pay thousands of dollars a year for those benefits, he said.

With a typical fixed-rate loan, a homeowner protects himself from the risk that rates will rise sharply later but pays a higher interest rate that increases his payment. A homeowner can, of course, refinance if loan rates drop sharply. But Mr. Greenspan said homeowners may pay 0.5 to 1.2 percentage points more than they otherwise would for those benefits. The Federal Reserve staff estimates that homeowners "might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade," Mr. Greenspan said, though not if interest rates had trended "sharply upward." 

"American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage," he said, though he didn't suggest specifics. If homeowners are worried about a sudden jump in mortgage payments but are "willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."

Mr. Greenspan reiterated that U.S. households appear to be in "good shape" and that their rising debts relative to incomes don't reflect increased "financial stress." He said their cost of servicing those debts has been relatively stable in the past two years, thanks to falling interest rates. Unlike homeowners, however, he said renters' increased financial obligations for things like rent, student loans and car payments "may be of concern." 

Increased bankruptcies "are not a reliable measure" of household financial health, he said, and delinquency rates also are flawed, though they currently paint a more encouraging picture, he said.

Meanwhile, credit-card debt has increased in part because it is replacing unsecured personal loans and because credit cards are used for an increasing variety of payments.

About three-quarters of the millions of homeowners who took out a new mortgage or refinanced an existing one during last year's boom locked in low fixed-rate loans ranging from 15 years to 30 years. Those rates were often one to two percentage points higher than adjustable-rate loans, on which the rate is usually fixed for the first one to seven years, then adjust up or down according to rates prevailing at the time of adjustment. 

The Fed chairman didn't advise households to choose adjustable-rateover fixed-rate mortgages. It is almost unheard of for an official of the U.S. central bank to offer advice on interest rates, over which it has enormous influence. But his remarks did represent a rare discussion of interest-rate options for American households, and he implicitly questioned whether homeowners' preference for fixed-rate mortgages makes financial sense. 

Whether an adjustable-rate mortgage makes sense now depends in part on whether the Fed keeps inflation, and thus interest rates, low, for the rest of the decade. However, adjustable-rate mortgages may make sense even if rates do eventually head up. Doug Duncan, chief economist at the Mortgage Bankers Association, said the share of mortgages carrying adjustable rates has more than doubled to about 25% in the past decade, as homeowners conclude they are unlikely to stay in their home for 15 to 30 years. He said he knew of one lender that now offers 130 different mortgage products, up from about 15 a decade ago.

Mr. Greenspan noted that in some other countries, adjustable-rate mortgages are far more common and that "efforts to introduce American-type fixed-rate mortgages generally have not been successful." That may be because homeowners in those countries believe the implicit fee for protection against rising rates and the right to refinance is too high, he said. 

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