This could be the year when the choice of mortgage plans increases for Americans buying homes.
An estimated 25 million households are currently paying off mortgages. The collective mortgage debt for owner-occupants and owners of rental homes is nearly $670 billion. Nearly 15 million U.S. houses are occupied by owners who have already paid off a mortgage.
In the near future, buyers could begin to chose between variable rate mortgages and the traditional fixed rate loan. They may also be able to take make the lower down payments called for by a graduated payment mortgage.
Some, on the other hand, may be able to use the mortgage as a source of income in later years of life by setting up "reverse mortgages" that provide monthly payments to the owners based on equity in their houses.
And there's also the possibility of the Canadian "rollover" mortgage, where the rate and the mortgage itself are renegotiated every five years.
All of these alternatives are fairly complex. Some of them are already being used in some states. The Federal Home Loan Bank Board, which regulates federal savings and loan institutions, is pushing for legislation that would allow these alternatives to be used widely.
"It's time for the public to be given an opportunity to have all types of mortgages with adequate safeguards," FHLBB chairman Robert H. McKinney said. "I think lenders can find ways to make new mortgages, including variable rate mortgages, attractive to home buyers.
Plans for this expansion of lending activity had been laid out before McKinney, a former S&L executive, took office last year. The savings and loan industry, which makes a large chunk of all residential mortgages loans, has been pressuring for change in legislation that would open the way for alternatives.
Savings and loan officials say they are caught in an inflationary money web. They maintain that the interest rates on new mortgages has been driven up because the portfolios of loans they hold are being paid off at fixed rates below or only slightly more than the current cost of obtaining money from depositors.
"Lending long and borrowing short has been the problem of thrift institutions for many years," said Stuart Davis, president of the U.S. League of Savings Associations. A Californian, Davis heads Great Western Savings, one of several state-regulated thrift institutions that have been making variable rate mortgages for three years.
California associations have demonstrated that the "VRM is not impossible to sell," Davis contends. "At the time we offered it there was ample fixed rate money available. We have offered the same rate and still attracted a tremendous volume of buyers."
As of Sept. 30, 1977, Great Western had moved half of its loan portfolio (3.2 billion of a total $3.1 billion) into variable rate mortgages, Davis said.
Of course, early last year, the California housing market was overheated and buyers security loans for houses they felt they needed as a hedge against inflation. At least some of those buyers must have regarded the available VRM loan as "an offer they couldn't refuse."
The membership of the National Savings and Loan League, the other major S&L trade association, has also reaffirmed continued support for its alternative mortgage instrument package. This includes provisions for variable rate mortgages, reverse annuity mortgages, graduated payment mortgages and Canadian rollovers.
The NSSL feels that the term of variable rate mortgages must be extended from 30 to 40 years, if necessary, to provide for constant mortgage payments. That means that if the interest rate on the loan is raised, the payments would remain constant but continue longer.
However, the Consumers Union is currently trying to find some answers to questions about the variable rate mortgage.
Will the fixed rate mortgages be phased out, for instance? Will the risk of inflation be shift to the consumer? Will consumers understand the VRM? Should the VRM carry a beginning rate below the fixed rate mortgage? Will there be limits on rate increases?
Stuart Davis points out that any increases in California are tied to an index of the cost of new money from savers. He said adjustments are permitted only every six months and are limited to 1/4 percent and to a total of 2 1/2 percent over the total life of the loan.
And the rate cannot be increased unless the cost of money increases at least 1/10th percent in a period. "We have had no rate increases under that formula," Davis added.
While Davis admits that the fixed rate mortgage has been "the one stable thing in our economy" in the inflationary last decade, he insisted that no one economic force can resist inflation. He also said that basic rates have been competitive and that the use of VRMs over a long period should enable the basic lending rate to be held down.
Robert F. McConkey, president of the Metropolitan Washington Savings and Loan League, says federal S&Ls in Washington welcome alternative mortgage choices. "No one thing is a panacea but we do need flexibility," he said.
DeWitt Hartwell, immediate past president of the area S&L group, said that the index on which rate increases are based is the toughest problem of the VRMs - "it should be outside the control of either the lender or borrower."
Preston Martin, a past chairman of the FHLBB and now president of a private mortgage insurance company, recently wrote in Professional Builder magazine: 'Spectacular growth in VRM use has to mean consumer acceptance."
However, he also pointed to research done by the FHLBB showing that borrowers didn't care about assumability or the lack of prepayment penalty but were mainly interested in down payments, interest rates and closing-costs.
He added that VRM home owners "understood the mortgage pretty well" and that the most confusing aspect in California was rate changes.
To builders, Martin suggested: "Why should you care? Because lenders love the VRM. Try to bargain with them to convert their passion into a bigger loan or a lower monthly payment."
Earlier this year Rep. Frank Annunzio (D-Ill.) introduced a bill that would aid young home buyers and older owners. Under the graduated mortgage payment he proposed, the monthly cost would start at a low level and increase during the life of the mortgage.
For older owners, a provision would enable senior citizens to retain ownership of their houses and draw monthly checks based on the equity in the house. If the owner died or decided to sell, the amount of the checks and any interest charges would be deducted from the proceeds of the sale and returned to the lender.
But despite new interest in such instruments as the variable rate mortgage, reluctance to give up the fixed rate mortgage can be expected.
Several generations of Americans have become home owners under mortgage terms that didn't change while they were paying off their loans. However, current mortgage market rates now range between 9 1/4 to 9 1/2 percent in most parts of the nation. For the most part, mortgage rates have not gone higher than that in the past.
As a result, some prospective buyers are reluctant to commit themselves to high terms for a long period, or to give up an existing mortgage with a rate lower than 7 percent to take on a mortgage with a much higher rate.
Some owner, on the other hand, are refinancing at higher rates because of the tax advantage.
"We're going to build a new house with a big mortgage because we need the deductions and the likely appreciation," one Norbeck area couple said recently.
At some point - some housing professionals and lenders think it may be when rates reach 10 percent - home buyers can be turned off - either psychologically or financially.
While 1978 seems to be a year of rising mortgage interest rates, it might also be the year of the VRM, the GPM, the reverse annuity and the Canadian rollover - all alternative mortgage instruments that might appeal to some home buyers but turn off others.