The Federal Home Loan Bank Board yesterday authorized federal savings and loan associations across the nation to offer graduated payment and reverse annuity mortages.
It also authorized California thrifts to offer controversial variable rate mortgages.
The action drew immediate fire from two key members of Congress.
Graduated payment mortgages (GPM) feature lower schedule payments in the early yearsm, rising gradually to a given level. The FHLBB estimates that 2.5 million young, upwardly mobile families now unable to afford standard, fixed-rate mortgages payments will be able to buy homes on GPMs.
Reverse annuity mortgages are designed to let older homeowners draw on the accumulated equity in their houses.
Variable rate mortgages (VRM) payments increase or decrease within set limits tied to a cost of funds index. Currently state chartered thrifts in 22 states offer VRMs, but most of the activity is in California where $15 billion in these mortgages have been closed. The regulation would allow federally chartered S&Ls there to meet this competition. The alternative mortgages generally are not available in Washington's private lending market.
"We believe that these new mortgage instruments provide both flexibility in financing and consumer protection for the American homebuyers," Said FHLBB chairman Robert H. McKinney. He added, "These new mortgages are already beginning to develop state by state, and it is important the bank board act promptly so as to provide national consumer protection standards."
The announcement caps a 2 1/2-year fight with Congress over a variable rate mortgages.
Sen. William Proxmire, (D-Wis) chairman of the Senate Banking Committee, which overseas the bank board yesterday charged the FHLBB with "usurping the powers of Congress" and called it a "serious breach of faifth with the Congress."
Legally the bank board had the power to permit VRMs, but politically it had agreed to abide by the legislature's wishes. In 1975 both houses of Congress voted to prohibit the bank board from authorizing VRMs without congressional approval. However, last summer both banking committees, faced with rapidly rising interest rates and dwindling funds, approved VRMs.
Proxmire said he intends to introduce legislation to incorporate consumer safeguards into law. But Rep. Frank Annunzio (D-I11.), chairman of the House banking consumer affairs subcommittee, intends to introduce a bill to stop the VRM, which he called "legal loan sharking."
A VRM eliminates most households' primary inflation hedge, a fixed mortgage.Rates will be allowed to rise a maximum of one half percent a year, or 2.5 percent over the life of the loan, if the cost of funds continues to rise.
Critics of variable rate mortgages charge they contribute to higher interest rates. FHLBB's McKinney countered yesterday that competition among state and federally chartered S&Ls in California will bring rates down. Moreover, he said consumer safeguards built into the regulations would address most congressional objections.
Thrifts will be required to make detailed disclosure statements to VRM borrowers, including a comparison with costs of a standard mortgage, the schedule for increases (or decreases), the right to extend maturity in the event of a rate increase, and information about the cost of funds index. No home buyer will be forced to accept a VRM.
In addition, the bank board will not allow an S&L to lend more than half of its home mortgage funds in the form of VRMs. Authorization to make VRMs will be made by the board on a state-by-state basis. At this time no other states are being considered. A four-year limit has been put on the California experiment.
Graduated payment mortgages were approved on a nationwide basis because they are not as controversial as VRMs, and the experience of the Department of Housing and Urban Development with government-backed FHA and VA graduated payment mortgages has been good. Since GPMs are not the money makers that variable rate mortgages are, there has been little rush by lenders to offer them. Banks and thrifts in only 12 states now offer them, according to the U.S. League of Savings Associations.
Similarly, reverse annuity mortgages, also approved yesterday, are still rare due to their complexity.