Hundreds of thousands of American homeowners are unaware of it, but the "nonassumable," below-market-rate mortgages on their houses have become assumable--and thus more valuable--during the past seven months.
This unpublicized, seemingly magical transformation is the result of an $11 billion series of mortgage "swaps" under way between local lenders and a Washington-based corporation.
Your own home could be one of those directly affected. Or the home you want to buy could now carry attractive financing possibilities, unbenownst to the owner or real-estate broker handling the sale.
Here are the facts: Last fall, a huge, congressionally chartered investor in American residential loans, the Federal Home Loan Mortgage Corp., know in the finance field as Freddie Mac, made an intriguing offer to savings and loan associations across the country. Put together packages of your low-rate, money-losing mortgages from the mid to late 1970s, it said, and we'll buy them from you. But instead of paying for them in cash--which would necessitate large losses for the S&Ls--Freddie Mac offered to swap a form of mortgage security (similar to a bond) that it pioneered.
The securities would have modest fees built in to compensate Freddie Mac. But they'd also have significant tax and financial advantages for the S&Ls. Most important, they'd get the albatross of below-market, fixed-rate loans--many of them with 20 to 25 years yet to run--off the necks of the lenders who created them.
Hard-pressed S&Ls jumped at the opportunity. Since the first offer, $11 billion worth of loan-exchange commitments have been made between the corporation and local lending institutions. About $5 billion worth of deals already have been closed. The total number of houses involved is somehere between 325,000 and 400,000. More exchanges are on the way.
But what do these mass swaps have to do with mortgage assumptions? And why has the public generally bee in the the dark about it?
To get the answers you have to understand what's known as the "due-on-sale" clause. It has been a standard fixture in conventional (not FHA or VA) home loans since the early 1970s. It empowers the lender making the mortgage or deed of trust to demand immediate payment of the entire debt--or raise the interest rate without limit--if the borrower tries to sell the house and pass along the existing loan to the new buyer.
Although the legal standing of due-on-sale clauses is a matter of dispute nationwide (the Supreme Court will rule on its first case next spring), their effect on home sales since the late 1970s is indisputable.
They prevent sales. They depress real estate prices. They force well-qualified buyers who'd otherwise be able to step into the shoes of the seller--and take over an 8 percent or 9 percent loan--to grapple with 17 or 18 percent market rates.
Virtually all of the low-rate loans swapped in the past half year contain enforceable due-on-sale clauses. Sitting in the portfolios of their original lenders, the loans were indeed nonassumable. However, once they've been packaged into mortgage securities underwritten by the Freddie Mac, they come under a different set of rules.
Freddie Mac permits asumptions of the loans contained in its securities at the original interest rate, provided:
* The home buyer taking over the loan fully meets the standard tests of creditworthiness; and
* The original lender (generally an S&L) does not opt to buy back the mortgage and raise the rate. (This rarely occurs. Having sold the loan, an S&L is normally content to service it--that is, collect payments and maintain the ledger--for an annual fee.)
Freddic Mac actually prohibits rate increases on the loans backing its securities. It does so, conceded a Freddie Mac spokesman, not out of a burning desire to help home owners sell their homes at a profit. Rather, its policy derives from the need for uniformity in its loan pools, making Freddie Mac securities more readily salable by Wall Street.
Freddie Mac never plugged the seemingly proconsumer aspect of its swap program, according to the spokesman, because the "whole effort really has been directed at lending institutions. By helping lenders with their problems, he said, "we help put more money into the entire mortgage market."
Ther fact is, though, that Freddie Mac's program is a potential boon to any homeowner whose mortgage has been swapped. It opens the door to thousands of unanticipated sales via low-rate assumptions, possibly with seller take-back second mortgages to further assist buyers.
Since local lenders typically don't inform borrowers when their loans have been sold or swapped, interested homeowners will need to inquire at their S&Ls. Ask if your mmortgage has been swapped in the "Guarantor" program of Freddie Mac. If it has, and you're planning to sell, bring in your sales contract and your intended purchaser to the lender. If the buyer passes the credit test--and your S&L isn't ornery--that nonassumable loan of yours should turn out to be assumable, with no interest rate increase.
Kenneth R. Harney is editor and publisher of the Harney Wahington Real Estate Report, a biweekly newsletter.