Mortgage rates around the country have begun to inch downward from their historic highs of November, but Washington area buyers and sellers shouldn't expect major improvements in credit availability until well into 1980, at best.
The outlook for next year, private and government mortgage market analysts agree, is austere: Savings and loan associations and mortgage bankers will have expensive money to loan, rates should average 11 1/2 to 12 percent or higher, and down payment requirements generally will be greater than in periods when lenders are flush with cash.
Analysts also agree that 1980 will see a continuation of current trends toward alternative or "creative" home finance techniques, further growth of secondary mortgage market transactions, the scrapping of more state usury ceilings for home loan rates, and possibly new federal moves to bolster the housing market in a political year.
Distilled from discussions with S&L executives and mortgage brokers and the projections of key economists in the field, here is an overview of the principal financial forces that will be at work in the coming six to nine months.
The dip in interest rates registered nationwide within the past 10 days "could be a sign that we are past the peak," says Jay Janis, chairman of the Federal Home Loan Bank Board, regulatory agency for the thrift institutions. Prevailing rates in the Washington area stabilized two weeks ago -- at 13 1/2 to 14 percent -- and have since dropped by 1/4 to 1/2 percent. a
But there is little hope here or nationally for any precipitous rate declines because S&L and other mortgage sources are paying such high prices to attract money in the first place.
Savers continue to pull their money completely out of thrift institutions -- for reinvestment in short-term Treasury bills or money market mutual funds -- or shift their dollars to S&L certificates of deposit bearing high interest rates. Bank Board statistics indicate that nearly one third of all S&L deposits are now in the form of "money market certificates" or jumbo certificates of deposit, up from only a tiny fraction 15 months ago.
The jumbo certificates have no interest rate restrictions whatsoever -- some have yielded well over 14 percent in recent weeks -- but required $100,000 minimum deposits. The more popular, six-month money market certificates carry $10,000 minimums and currently yield 11 to 11 1/2 percent, but were yielding more than 12 percent within the past two weeks.
Nationally, passbook deposits in S&Ls paying 5 1/2 to 6 percent have registered a $15.3 billion decline this year, and deposits in traditional, lower yielding S&L certificates of one to four years (primarily paying 7 to 8 percent) have plummeted by $33.3 billion. These outflows have been countered by an $81.6 billion gain in mortgage market certificates and jumbo certificates, but the resultant increase in the average cost of funds is building a very high minimum below which mortgage rates cannot drop.
S&Ls and banks need to be able to tack on a 2 or 3 percent "spread" in order to lend borrowed money profitably; adding 2 percent to the double-digit costs of their current funds virtually ensures rates of 11 3/4 percent or more through mid-1980, local S&L executives say.
In fact, some local lenders forsee relatively little mortgage activity in 1980 as the result of fresh deposits. They are looking increasingly to the secondary mortgage market, where they resell their home loan commitments to huge investors such as the Federal Home Loan Mortgage Corp. ("Freddy Mac"), the Federal National Mortgage Association ("Fannie Mae"), and insurance companies.
Orlando Darden, president of Community Federal Savings and Loan Association, said that at present, his institution is out of the market for new loans. But when the S&L returns to the market it will almost exclusively be "packaging loans for resale to the secondary market." Other S&Ls here have been selling a high proportion of their new loans to secondary investors for much of 1979 because deposits have been so weak.
When a lending institution sells loans to investors such as Fannie Mae or Freddy Mac, it normally retains the responsibility for "servicing" them -- collecting the monthly payments on the loans and making certain the borrowers do not default. For this, the lender receives fees based on a percentage of the principal amount of the loan involved.
In short, the dollars that an S&L commits to loan to you, ostensibly from its own deposit resources, may really be coming from an outside investor. That investor raises loan dollars by selling notes, stock or bonds in the capital markets, or by selling shares in pools of some of its existing inventories of mortgages.
About one out of five home mortgages nationwide is now financed with secondary market funds, according to John Horseman, senior vice president of Verex Assurance Inc. of Madison, Wis., a major secondary market intermediary. However, one out of every two new mortgages will be financed this way "before the end of the decade" of the 1980s, Horseman predicted.
Some of the secondary market funds already are being raised from Eurodollar accounts held in continental banks; some are also being pulled in from OPEC petrodollar reserves. Both of these sources could be important in sustaining mortgage volume and home building in the early 1980s -- and both are vulnerable to international political and monetary swings.
For the short term -- the first six months of 1980 -- home buyers and sellers here will have to make do in a tight market. That means shopping vigorously among S&Ls, mortgage bankers, credit unions and commerical banks to find the lowest rates and best combinations of terms.
Buyers should be aware that fund availability at mortgage sources -- especially mortgage bankers -- can change radically overnight. One day a mortgage banker may be quoting 14 percent; the next day, thanks to negotiations with a pension fund or insurance company, the firm suddenly has a lot of money at bargain rates.
A prime example of this right now is Guardian Mortgage and Investment Corp. of Springfield, which has just received an unexpected $4 million chunk of capital from a local investor to lend at 11 1/2 percent for 30-year deeds of trust, with one or two points to buyers and sellers.
The tight market also means that consumers should get more familiar with creative finance -- the use of techniques that reduce or eliminate the need for outside lenders to finance real estate transactions.
These techniques include provision by home sellers of:
A first deed of trust or mortgage to the buyer, with a short (three to five years) payback period, or longer period (20 to 30 years). With the help of a realty broker or attorney, the seller assumes the role of banker -- deferring a large portion of the proceeds from the house until the borrower refinances.
A second ("purchase money") deed of trust or mortgage to help the buyer come up with the down payment required by a conventional lender. In this case the seller loans only a small portion of the proceeds on the sale, usually at a high rate for a short period.
A land contract (or contract for deed) to finance the buyer. This approach resembles a first trust from seller to buyer, except that in a land contract the deed doesn't change hands until a point specified in the contract.
A "wraparound" mortgage from the seller to the buyer. This involves a secondary loan that is large enough to encompass (wrap around) the existing debt on a home, plus some new amount the seller is willing to defer out of the proceeds of the sale. It works best when a buyer is seeking to assume an existing, low-rate mortgage but requires a down payment far beyond his or her resources.
Buyers and sellers can also expect more innovative mortgage terms and formats from conventional lenders in the coming year.
One Cleveland S&L, for example, has just introduced a one-year mortgage for hard-pressed purchasers, convertible at any time into a long-term conventional mortgage carrying a rate that the S&L guarantees will not be higher than the first.
The so-called five-year Canadian "rollover" mortgage -- rate and terms for which are renegotiated at five-year intervals -- is also certain to become more common here, as long as the economy remains inflationary and short on capital.