VNB Mortgage Co. of Richmond will be the first institution to issue securities based on graduated payment mortgages under a program initiated last week by the Department of Housing and Urban Development. The $5 million issue will be used to finance low introductory mortgages throughout the state.
A graduated payment mortgage grants a home-buyer a break at the beginning, although the total finance cost is higher. For example, a conventional $50,000, 30-year mortgage at 9.5 percent entails $420 monthly payments. A graduated payment mortgage (GPM) starts $318 a month, climbing 7.5 a year until after five years the monthly paymet is $457 for the remaining years of the loan. The total cost is about $2,000 more.
This type of single-family house mortgage is gaining widespread acceptance throughout the country as a way of making housing more affordable for young buyers. HUD has offered FHA insurance on GPMs for the past year. This past week the agency announced that the Government National Mortgage Association (Ginnie Mae) would include GPMs along with conventionals in its mortgage pools, the basis of Ginnie Mae securities.
"The money generated by the new securities program should help many people buy their first homes-more than 40,000 in the months immediately ahead," said HUD Secretary Patricia Harris. She announced HUD already had received requests for more than 250 guaranteed commitments amounting to $1.8 billion. Lenders have been warehousing their GPM loans for some time in anticipation of disposing of them through HUD, which is offering a slightly better price than the Federal National Mortgage Association (Fannie Mae), the only other buyer.
The minimum for the new mortgage pools will be $1 million, and the securities will be sold in $25,000 minimums, yielding one half percent below the mortgage interest rate. Because of their safety, Ginnie Maes have become very popular with institutional investors; GPM-GNMA securities, as the new issues are known, are expected to follow suit.
The primary difference between the issues is in lower pass-through cash payments during the first five years when the home buyer is paying less than with a conventional mortgage, although the initially deffered interest is reinvested.
In a related development, the Federal Home Loan Mortgage Coporation (Freddie Mac) recently announced specification for rehabilitation and home improvement loans it expects to begin purchasing next year. The loans form the basis for its securities, too. Last year Freddie Mac bough $6.5 billion in conventional residential mortgages and sold $6.4 billion in securities.
The agency will buy a 50 to 90 percent interest in loan financing permanent improvements to one-to-four-family dwellings. Loans must be secured by a lien on the property and may not exceed $30,000 for a single-family house or $60,000 for a two-to-four family structure.