The Federal National Mortgage Association, in a move that will affect homebuyers across the nation, yesterday cleared the way for banks and savings and loan associations to sell almost any type of adjustable-rate mortgage the market will bear.
The association, commonly known as Fannie Mae, is the nation's biggest purchaser of mortgages in the secondary market. Banks and savings and loan associations have been waiting for the agency to announce what type of mortgages it would purchase before drafting rules for home loans to consumers.
The use of adjustable-rate mortgages was approved by the Federal Home Loan Bank Board earlier this year. Under the new plan, banks and savings and loans associations can tie a mortgage to a specific economic indicator and then change the terms of the loan according to changes in the indicator. In some, the amount of loan can even grow.
Adjustable-rate mortgages are expected to replace fixed-rate mortgages in large part, although it will probably always be possible to get a fixed-rate mortgage at a somewhat higher rate.
The immediate impact in the Washington area depends on where a mortgage buyer is seeking a loan. The District of Columbia, for example, bans certain types of mortgages authorized yesterday by Fannie Mae, while Maryland restricts sale of adjustable-rate mortgages to federally chartered institutions. Virginia permits sale of all the types of adjustable mortgages proposed yesterday.
Specifically, Fannie Mae yesterday said it would approve eight basic types of variable-rate mortgages in the secondary market effective Aug. 7. At the same time, however, the agency said it would consider any other type of variable mortgage on a case-by-case basis.
David Maxwell, Fannie Mae president, predicted the new type of mortgage would "revitalize" the nation's home mortgage industry by encouraging banks and savings and loan associations to increase mortgage lending.
"ARMs [adjustable-rate mortgages] are a necessary and constructive market response to the volatile economic conditions that have caused the most prolonged housing slump in recent years," Maxwell said.
It is expected that the bewildering number of mortgage choices initially being offered homebuyers eventually will be narrowed by the market place and by local laws and regulations.
The plans approved by Fannie Mae yesterday offer a variety of consumer alternatives, including the option of limits on interest rate changes and monthly payment increases from one adjustment period to another.
Five of the plans provide ceilings of one kind or another. Three offer payment caps which limits increases in monthly payments to 7.5 percent per year for mortgages indexed to one-and three-year Treasury securities, and 7.5 percent every six months for loans based on six-month bills.
Banks, for example, are currently limited to using the two plans that have limitations on the amount the interest rate can be adjusted. Half the plans involve negative amortizatin, or the addition of interest to the loan principal in place of payment increases. They cannot be used in about half ot he states because of state laws.
Another determinant, which Fannie Mae plans to announce at the end of July, is the price it will pay for the various types of mortgages.
The plans offer a choice of five indexes of interest rate changes, of which four are Treasury securities of six-month, and one- three- or five-year maturity. Fannie Mae also will purchase mortgages based on the Federal Home Loan Bank Board's index of new loans on existing homes because the Federal Home Loan Mortgage Corp., the other large secondary market maker, does so.
However, Fannie Mae does not favor this index because it does not change fast enough to reflect its cost of money.
The shorter the index term, the more dramatically mortgage payments can change. But long-term index rates tend to be higher.
If inflation causes the index rate to rise by more than 7.5 percent, the borrower has the option of either increasing monthly payments or having the excess payment required added to the principal, in states where negative amortization is permitted.
If this does occur, however, payments will be adjusted upward every five years so the monthly payment is enough to amortize the remaining deby. This is to prevent the homeowner from having a huge balloon payment at the end of the mortgage term.
Negative amortization will not be permitted beyond 125 percent of the original loan. If the change in the index means the negative amortization will go above that point, the borrower loses the protection of the cap in his contract. In other words, he must increase payments or refinance.
Fannie Mae's advice to homebuyers is to shop around for the type of adjustable-rate mortgage that suits them best. In practice, the choice may be limited, however, by the lender.