A change in rules proposed late last month by the federal agency that regulates mortgage lenders could revolutionize housing finance here6782 Loan Bank Board's proposal to allow lenders to issue "renegotiable rate" mortgages is likely to begin producing a new breed of home loans sometime during the latter half of 1980. Over a period of several years, renegotiable "roll-over" mortgages of the type proposed by the board could become the predominant form of home loan in the U.S., virtually replacing the fixed-rate, long-term loan that has been standard for 40 years.
In brief, the bank board proposed that:
Federally chartered savings and loan associations be permitted for the first time to make mortgages whose interest rates could be adjusted every three to five years. The loans would carry the usual 25- to 30-year terms for full repayment, but could be "renegotiated" -- that is, the rate could be raised or lowered -- every third, fourth or fifth year.
The maximum change allowed per year would be 1/2 percent, but this would only occur at the intervals agreed upon by the lender and borrower at the beginning of the loan.
For example, if a buyer received a 14 percent mortgage from an S&L in 1980 and interest rates in the economy dipped during the succeeding three years, the rate could be reset at as low as 12 1/2 percent (14 minus 1/2 percent a year) in 1983. If mortgage rates increased during that period, the rate could be set as high as 15 1/2 percent at the end of the first renegotiation period.
No mortgage could be increased or decreased by more that 5 percentage points during its full term. Borrowers would be free to seek a new loan at any time from another lender, should better rates become available.
Lenders would be free to offer an unlimited percentage of their loan funds in the form of renegotiated mortgages. Thus, some S&Ls here might offer nothing but "rollover" loans a year from now, and might make no new loans with fixed rates.
The proposal is open for public comment until the end of February, at which point the bank board will prepare to issue final regulations, perhaps incorporating changes. It could be April before final rules are issued, board sources indicate, and lenders will take time to gear up with new forms and procedures. Some lenders also will probably wait for action by the Federal Home Loan Mortgage Corp. to create a secondary market, where they can reliably sell their new rollover loans.
The key attraction of the renegotiable mortgage plan to lenders is its flexibility in the face of persistent inflation and volatility in the cost of money.
Martin Weigand, president of the Metropolitan Washington Savings and Loan League and chairman of Metropolis Federal Savings and Loan Association, said the bank board's proposal "would enable us finally to adjust our prices to the real cost of funds" in the overall economy. Rather than having to take a 30-year gamble at a particular rate -- using deposit dollars that tend to remain in accounts for much shorter periods of time -- S&Ls could reprice their loans to some extent every three to five years.
Lenders currently charge rates that include unstated subsidies by new borrowers to borrowers from years back -- particularly the home buyers with 5 to 7 percent loans. Rates on new mortgages have to reflect the cost to lenders of all their incoming capital (passbook deposits and double-digit money market certificates), as well as the net yield on their existing portfolios of mortgage investments.
When new money is very costly and inflation high, as at present, lenders with portfolios loaded with low-rate mortgages begin to hurt badly and have to charge higher mortgage rates. If those rates could be adjusted at definite intervals, Weigland and other lenders maintain, the initial rates could be slightly lower because the risk of loss from low-yielding investments would be lower.
Consumers would also have the chance to see their mortgage rates decline over a period of years, assuming that inflation and the overall cost of capital in the economy declined. Buyers would share the risk of financing housing with their lenders, and lenders could provide more funds for home buying as a result.
Weigland, for one, plans to plunge into the new program as soon as it is put into final effect by the bank board.
"I don't think we'll want to loan money at fixed, long-term rates at all anymore, not when the economy is as unpredictable as it's been," he said. "We'll probably offer the rollover -- period."
Other area lenders said they'd probably ease their way into the program over a period of months, experimenting with the plan to see how well consumers accept it. If the reaction is favorable, though, they are certain rates.