In a decision that will reduce the value of a substantial number of homes in the Washington area, the Federal Home Loan Mortgage Corp. announced yesterday that it no longer will allow homeowners whose mortgages it has bought to pass these low-interest loans along to new buyers.
The corporation, known as Freddie Mac, has bought 700,000 to 900,000 mortgages nationwide. It purchased about 20 percent of all the mortgage loans made in the Washington area last year, according to a spokesman.
Buyers' assumption of existing mortgages has been an increasingly important factor in home sales in recent years, because most buyers are unable to afford new, conventional 30-year mortgages at rates of up to 17 percent. With the Aug. 2 elimination of assumptions on Freddie Mac-owned mortgages, sellers would have to reduce sales prices to offset higher mortgage interest.
Homeowners across the country affected by the new Freddie Mac policy are not likely to know it, because when a mortgage is sold to Freddie Mac the homeowner generally continues making payments to the original lender.
A homeowner would have to contact the servicing lender to determine whether a mortgage has been bought by Freddie Mac. Freddie Mac is a profit-making member of the secondary mortgage market, which acts as a conduit between investors and the savings and loan industry.
The decision does not affect FHA- or VA-insured loans, which still are fully assumable with no escalation of the interest rate allowed for the new buyer. These mortgages, which together represent about 20 percent of all mortgages nationwide, are controlled by policy at the Department of Housing and Urban Development.
The President's Commission on Housing proposed this year that FHA and VA mortgages be made nonassumable also, but HUD officials said this week that no change of this kind is in the works.
The reversal of Freddie Mac policy was the second action taken this week against assumptions of older fixed-rate loans by new homebuyers. Earlier, the Supreme Court ruled that federally chartered savings and loans can call a loan due and payable when a house is sold, regardless of contrary state law.
The new Freddie Mac policy will have a greater impact on homesellers and buyers in this area than the Supreme Court decision, which only applied directly to loans in some 12 states that had tried to prevent lenders from calling a loan due when it was sold.
The issue of assumability has pitted the beleaguered savings and loans directly against their traditional best customers, the housing industry. Both industries have been hit hard by soaring interest rates. S&Ls have been trying to get the older unprofitable loans off their books and have moved to protect themselves in the future by going to adjustable-rate mortgages.
Last year, assumptions of older mortgages were used in 42 percent of all home purchases, with most of these involving no escalation of the interest rate on the old loan, according to the National Association of Realtors.
In making its announcement, Freddie Mac said the new policy "is in the best interest of mortgage lenders, investors and homebuyers. Without this change in our policy, the cost of mortgage money would continue to rise and adversely affect the affordability of housing."
Critics of assumptions have argued that they benefit only a lucky few and that other buyers and sellers in the long run must make up the difference in higher interest rates generally.
For those whose loans just became nonassumable, the dollar loss is substantial.
An example offered by the Mortgage Bankers Association: If a $100,000 house has a $75,000 assumable mortgage with a 10 percent interest rate, a buyer could put down $25,000 and take over payments of $681 a month. If the same buyer had to pay a 17 percent market rate on a $75,000 balance, the payment would be $1,078.
If a homeseller had to reduce the price of the house to make up the difference in the value of the assumable and nonassumable loans, it would have to be dropped from $100,000 to $72,000, the MBA analysis said.
Real estate experts point out that S&Ls frequently have tried to accommodate customers with low-interest loans by allowing a "blend" of the old rate and market rates.
To slide under the Aug. 2 end to Freddie Mac assumptions, a deal must have gone to settlement by that date, a Freddie Mac aide said.