Ever since the birth of the Federal Housing Administration more than 40 years ago, U.S. citizens have become accustomed to using long-term, fixed-rate, fully amortized mortgages with relatively low down payments as the basic means of financing the purchases of their homes.
Meanwhile, since those Depression years when many owners lost their homes because they were not able to pay off their on-call mortgages at the end of any year, home ownership has doubled to the point that now approximately 65 per cent of American families lives in homes that they own - most of them with benefit of a mortgage.
However, the housing marketplace has been troubled in the past decade with unstable interest rates and inflation became a serious economic problem. Now it is recognized that many families and individuals buying their first homes are having trouble meeting down-payment requirements. They are also finding it difficult to manage monthly payments that have been inflated by high interest rates, plus increased taxes and utility bills.
As a result, serious consideration now is being given by Congress and the thrift institutions that finance most housing purchases to alternative mortgage instruments and to new saving and financing opportunities related to home ownership.
At recent hearings held by the Senate Committee on Banking, Housing and Urban Affairs, Washington savings and loan executive John U. Raymond endorsed a legislative proposal by Sen. Edward Brooke (R-Mass.), whereby savers could accumulate up to $10,000 toward a down payment on a home purchase in a tax-deferred "individual housing account" as one of the "most powerful incentives I can imagine for thrift and home ownership."
Raymond also backed legislation by Sen. Brooke and Sen. William Proxmire (D-Wis.), committee chairman, to expand an experimental plan by the Department of Housing and Urban Development to enable home buyers to start payments on FHA-insured mortgages at a lower than usual level and then gradually increase the payment for 10 years before leveling off.
On the topic of greater experimentation with alternative mortgage instruments, Raymond, speaking as a member of the executive committee of the U.S. League of Savings Associations, testified:
"Flexibility in mortgage loans would provide new options which may appeal to a broader segment of the population which is currently unable to enter the housing market because of the monthly payment ridigity found in existing long-term, fixed-rate mortgage contracts."
These alternatives, which also are the subject of an on-going study by the Federal Home Loan Bank Board (which regulates the S&L industry) and other groups interested in increasing the scope of home ownerships, include:
Interest-only provisions for the first five years of a mortgage.
So-called "reverse mortgages" which would permit S&Ls to offer established customers annuity-life payments enabling them to use the savings that built-up equaity in their deed as being especially interesting to older couples whose limited retirement incomes are eroded by increasing taxes and costs of utility services and home maintenance.
Contractural provisions that would enable a borrower to obtain an additional line of credit supported by payment performance and "skip" payment clauses to permit consumers to miss their monthly obligations when unexpectedly disabled or unemployed!
A deferred-interest loan, wherein a significantly lower interest rate (producing lower monthly payments) would enable the mortgage lender to receive the deferred interest plus a fee upon sale of the house. The theory here is that a young couple not likely to live in a house more than five years could enjoy lower monthly payments and repay the lender or the government out of appreciation realized on the sale of the house. That expectation is based on the recent record of high appreciation in both new and resale houses in line with inflationary trends that have become SOP.
A variable interest rate loan where the rate would vary according to a reference index, with the changing interest rate being accompanied by changes in the monthly payment, the maturity of the loan or a combination thereof. Assumption of the loan on sale to another person and an opened line of credit would also be features of this kind of variable interest rate loan. Although subject to criticism, the variable interest rate idea is based on the fact that the recent rises in mortgage interest rates to current and recent buyers reflect the mortgage loan portfolios of lenders who have older loans on the books at interest rates below the rates now paid for long-term deposits and near the basic rate paid on passbook savings, 5.25 per cent.
A Canadian "roll-over" mortgage, which provides that the maturity of the loan is fixed (at 25 or 30 years, for instance) but that the interest rate is renegotiated every five years on the basis of current market conditions.
At the recent Senate hearings, David L. Smith, a senior officer and chief economist at Glendale (Calif.) Federal S&L, said on behalf of the National Savings and Loan League that the primary advantages of graduated payment mortgages are that they enable young families to purchase homes with payments more closely corresponding to their income growth over a period of years, thus allowing them to buy a somewhat costlier home. But he said that a drawback is that marketing research indicated that potential home buyers would choose the GPM plan over the standard mortgage payment if they knew the payment and amortization schedules and compared them in advance. The Savings and Loan League supported the concept of an individual housing account for persons saving to buy a house but Smith added that the government could save money on that proposal by limiting it to first-time buyers and reducing the annual maximum deduction of tax-free saving to $1,500 and to a life-time total of $6,000, instead of $10,000.
The Senate Banking Committee was also told that the median price of a new home in 10 years will reach $90,000. Story on D12.