The Federal National Mortgage Association has cut back its 12-month mortgage commitments by two-thirds.
That move, along with tightening of credit by banks and thrift institutions, can be expected to contribute to a decrease in new housing this fall, according to Mark Riedy, executive vice president of the Mortgage Bankers Association.
Meanwhile in California, where conventional mortgage rates hit 10 percent a few weeks ago, savings and loan associations are experiencing difficulty in marketing pass-through securities backed by mortgages. This week California Federal in Lost Angeles postponed its $50 million offering indefinitely because yields were not high enough to compete with other types of investments. Other S&Ls have had to increase yields on outstanding pass-through issues. The effect may be a limit on expansion of mortgage funds in that state.
The weekly ceiling on Fannie Mae commitments was reduced to $1 million per mortgage lender from $3 million three weeks ago, and from $5 million in February. Prior to that, there was no limit.
A Fannie Mae spokeswoman said that purpose was twofold: to reduce long-term commitments so that the the agency will not find itself unable to borrow enough money to honor them, and to ration existing funds so that smaller institutions will not be crowded out by big buyers. However, she said the total amount of commitments would bot be affected because mortgage lenders can secure an unlimited amount at auction.
A 12-month commitment is essentially sold as protection for a tract developer against rising interest rates. Delivery is not intended so the rate is set high.
Twelve-month commitments are then converted to 4-month commitments, which are auctioned every two weeks. At the last auction, the yield for 4-month commitments on conventional mortgage was 9.891 percent. The yield required for 12-month commitments on conventional mortgages, is 10.15 percent.
Recently mortgage rates have risen so fast that they could outpace commitments made a year in advance.
Rates may hit 10 percent in other parts of the country this year. For this reason Fannie Mae would prefer not to commit itself so far ahead to sell at a fixed price. By cutting down the amount of 12-month commitments a mortgage lender can buy in one week to $1 million, it is forcing them to obtain funds in the biweekly auction market where the point spread is more in Fannie Mae's favor.
Thus mortgage lenders are able to offer less of a hedge to builders and construction suffers, Riedy explained. However, he noted that a lot of what will be constructed this year is already pre-committed, so the impact of Fannie Mae's reduction in 12-month commitments will not be that severe. It is set against the difficulties banks and savings and loan associations are having getting money to lend that it becomes significant. Existing housing sales would not be affected, he added.
In addition, resale financing on existing condominiums and planned unit developments should be easier to obtain under a new program begun by FNMA.
Under the plan, FNMA will approve secondary mortgage market loans on existing developments whose community associations comply with its management and financial requirements.
C. James Dowden, executive vice president of the Community Associations Institute, said that the CAI had worked with FNMA to enable associations to meet requirments that will "substantially improve the prospects for resale financing in their communities."
He added that lenders are "much more willing to provide a unit mortgage in a FNMA-approved project because the lender knows that the project meets the stringent FNMA requirements for association management and finances and that FNMA would be willing to purchase mortgages in such projects."
Financing approvals by FNMA are normally obtained by the developer during the construction period.However, Dowden said, those condominium apartments and communities without prior federal lending-related approval have been having difficulty in obtaining such financing approval after the developer has sold out the project.