The Federal Home Loan Mortgage Corp. yesterday announced it would not purchase any of the new variable-rate mortgages from savings and loan institutions if the interest rates charged homebuyers change more than once a year.
The corporation, more familiarly known as Freddie Mac, announced the interest limitation as part of new guidelines under which it would purchase mortgages from savings and loan institutions in the secondary market.
Under the guidelines, the corporation said it would buy both mortgages with no limits on interest-rate increases or decreases and those mortgages on which interest rates may increase or decrease by a maximum of 2 percentage points.
In both cases, interest rate changes would be tied to the Federal Home Loan Bank Board's mortgage contract rate, and rates could not be changed more than once a year.
The mortgage corporation said it would not purchase any mortgages involving so-called negative amortization -- a situation whereby monthly payments remain the same but the balance of the loan or the length of the mortgage is increased.
Freddie Mac's president, Philip R. Brinkerhoff, said the restrictions -- which are subject to revision -- were imposed in the interest of finding a proper balance among the needs of consumers, lenders, and investors. Thus, for the home buyer, Freddie Mac has selected one of the least volatile indexes so that mortgages payments are not subject to wild swings.
When the Federal Home Loan Bank Board recently outlined its adjustable-rate loan program giving the lender carte blanche to set terms, consumer groups issued dire warnings about loan rates changing monthly and homeowners losing their initial investments through increases in the outstanding balances of their mortgage loans.
The Bank Board said at the time it expected market competition to set terms on the new type loans. This, in effect, is what Freddie Mac's action does, because few lenders today want to risk keeping loans in their portfolios and suffering the consequences of inflation when they can sell them off in the secondary market. So many will tailor their loans to the conditions set by the secondary market.
The other large secondary market is made by the Federal National Mortgage Association, Fannie Mae, which plans to announce its own adjustable-rate mortgage purchase program soon. Fannie Mae is expected to be setting somewhat different terms.
As for investors who buy the securities based on the mortgages Freddie Mac buys, Brinkerhoff said they had "substantial discomfort" with the idea of negative amortization as well as "substantial technical tax and accounting problems" with such loans.
Dale Riordan, chief economist of the National Savings and Loan League, expressed "disappointment" at the initial restrictions Freddie Mac has placed on the loans it will buy.
Freddie Mac is a private corporation chartered by Congress to buy up residential loans from banks and thrifts and pump money back into the housing market. Last year it was committed to purchase $3.9 billion in conventional mortgages. This year's purchases are running about half that amount on an annualized basis. It is not yet known what proportion will be adjustable rate mortgages.