THE DECISION by the Federal Home Loan Bank Board to authorize several new types of home mortgages is sound. The traditional system- $425 a month, say, for 25 or 30 years-has worked well. But the loan system needs more flexibility now to accomodate the pressure of steady inflation and the changing needs of home buyers. The changes the bank board has authorized, once they are fully effective, should provide that and make it easier for thousands who now rent to buy houses.
The most important of the new mortgages, known as a "variable-rate mortgage," will be confined at first to California. That, apparently, is to give the bank board an opportunity to see how the new system works and to give Congress a chance to have a say in its expansion, while putting the federal SS&Ls there on a more competitive footing with state-chartered institutions. State S&Ls in California have written more than 225,000 variable-rate mortgages, with a value of about $15 billion, in the last two years. With that kind of mortgage, the interest rate you pay can be changed, either up or down, once a year, depending on the rate of interest the S&L is paying for the money it has loaned you. To cover an increase, which cannot be greater than half a percentage point in one year or 2.5 percentage points over the life of the mortgage, you can choose between making higher monthly payments of extending the length of the loan.
In theory, at least, the original interest rate on such mortgages will be lower than the rate on traditional ones. That's because the S&Ls will not have to worry so much about being stuck for many years, as they are now, with mortgages on which the interest rate is far below the current market.
Another type of new mortgage, which all federal S&Ls will be permitted to offer in January, should bolster the housing market immediately. It is a "graduated-payment mortgage", the monthly payments start low and increase as time goes on. That is to help young people buy houses now that they will be able to afford in five or 10 years. Bank-board studies estimate that those mortgages could make it possible for as many as 11 percent of the nation's renters to buy now rather than wait until their earnings increase.
The third major new mortgage, on which the bank board wants to proceed slowly, is a "reverse annuity." That would permit the elderly to borrow against the value of their homes. They would receive, say $100 a month from the S&L and the size of their loan would increase accordingly. The arrangement would make it possible for the elderly, some of whom are being driven out of their homes by high taxes, to use the equity they have built up while they are still alive. But it also presents the possibility that the S&Ls might foreclose on the loans and rive them out their homes that way, if they lived too long and the loans got too large.
The savings and loan industry has been eager to get the flexibility these new mortgages provide, but Congress has been reluctant to let them have it. Now that the bank board has taken the initiative, the job of Congress should be to make sure there are adequate consumer safeguards. These should take the form, primarily, of giving the borrowers, as well as the S&Ls, flexibility. Too much of the mortgage business in the past has involved fitting people into categories that often have little relationship to individual situations.In the process of overseeing what the bank board has done, Congress should also take a hard look at the practice of charging "points" on home loans. That pernicious device was created to give the S&Ls more flexibility, and it ought to be barred, now that the bank board has found other ways to provide what the S&Ls need.