Home improvements as an alternative to the high cost of housing have become an increasingly big business. This year it is predicted homeowners will spend an estimated $37 billion fixing up their dwellings; they will account for nearly half of the residential building materials used.
The boom has spurred the Federal Home Loan Mortgage Corp. to ask Congress for permission to begin a secondary market for rehabilitation and home improvement loans, both second trust notes secured by the property and unsecured loans. Since 1972, Freddie Mac, a subsidiary of the Federal Home Loan Bank Board, has been purchasing conventional first mortgage loans from primary lenders (mostly savings and loan associations) and reselling them in capital markets in the form of participation certificates.
Currently there is no secondary market for home improvement loans. This gap has prevented some lenders from making these loans on a large scale. Freddie Mac officials forsee that the home improvements field will continue to increase, especially in the area of energy conservation as owners strive to beat fuel costs through thicker insulation and heat pumps.
A survey of lenders convinced Freddie Mac that it could expect to buy about $200 million worth of property improvement loans the first year, on top of its $10 billion commitment to pruchase mortgage loans. The corporation will work jointly with the Federal National Mortgage Association to develop standardized loan documents and forms geared to help lenders sell these loans to outsders.
Fannie Mae, which already has the statutory authority required, has been buying second trusts and alternative mortgage instruments for more than a year in a pilot project in St. Louis. It is now studying the possibility of also making a secondary market for rehabilitation and home improvement loans.
A related announcement last week concerns the inauguration by Freddie Mac of a pilot conventional home mortgage eight-month forward commitment program. The program will alternate with the six-month commitment program every two weeks.
Forward commitments provide a guarantee by Freddie Mac to purchase conventional home mortgages from sellers at a given date at given price unless the seller gets a better price elsewhere. The extension in forward commitment time, which will be evaluated after a three-month trial, was made at the request of primary mortgage lenders.