The nationwide boom in "creative financing" of home sales could lose some of its steam as the result of new, unpublicized decisions by the country's two largest purchasers of residential mortgages.
The Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association, which pump billions of dollars into housing annually by buying loans from local lenders, have ruled out or restricted purchase of some of the most common forms of creatively financed home mortgages.
Their policy decisions could pull the rug out from under builders who offer subsidized interest rates and other inducements to buyers, and prevent home purchases by consumers who otherwise cannot qualify for loans at today's prevailing rates of 15 percent and higher. Local lenders who permit "balloon" secondary mortgages in conjunction with loan assumptions on resale houses could also be adversely affected.
Builder "buy-downs" (subsidies) of buyers' interest rates, to bring them down to 11 and 12 percent, have been commonplace for the past four months, as the hard-pressed construction industry has sought to market tens of thousands of completed but unsold houses.
In two memos to its top regional officials late last month, the Federal Home Loan Mortgage Corp. instructed them to refuse purchase of any mortgages closed after June 30, in which periodic "subsidy payments" are made on behalf of the buyer by the builder or other seller.
The corporation, known as Freddy Mac, also told its officials special promotional concessions from a home seller to the buyer -- such as cash rebates or "buy-downs" of consumers' mortgage interest rates by builders -- must be subtracted from the appraised valuation of the home itself. That, in turn, reduces the amount of the mortgage loan the corporation would buy, and could force consumers to make larger down payments to local lenders.
Freddy Mac also said it would no longer purchase mortgages on houses carrying secondary loans in which payments are made on other than standard, monthly equal amortization plans. This rules out the rapidly growing number of financing arrangements whereby secondary loans are "custom-tailored" to meet buyers' or sellers' needs.
The most common plan involves second mortgages of three to five years with payments kept artificially low during that period, followed by lump-sum or "balloon" payment of remaining principal and interest. Such loans -- known as "sleepy seconds" on the West Coast -- postpone cash outlays for down payments by purchasers.
Builders and realty brokers in many areas of the United States have used these and similar arrangements to survive in a market where prevailing mortgage financing rates hit 17 and 18 percent.
Local lenders, particularly savings and loan assocations, have been willing to go along with some "creative" plans in the expectation they could sell the underlying mortgages to Freddy Mac, which exists to help replenish thrift institutions' resources. In 1979, the corporation purchased $5.7 billion in home mortgages, and was vital to many S&L activities.
Freddy Mac's policy statements to its regional offices, however, argued the 1980's money market conditions "have changed the character of secondary financing in a manner that has disturbing long-range implications."
A spokesman for the corporation said the recent proliferation of higher-risk creative financing plans -- many of which depend heavily on buyers' ability to pay off balloons and other indebtedness later on -- has become worrisome to the Wall Street investors who provide funds for the congressionally chartered corporation. Some of the plans also appear to encourage early payoffs or refinancing of loans, thereby disturbing the stability of the mortgage pools marketed by Freddy Mac to outside investors.
Another huge buyer of mortgages, the $51 billion-asset Federal National Mortgage Association, or Fannie Mae, also informed its regional offices of "restrictions on "creative financing" loan purchases. Fannie Mae said it "will not knowingly purchase any mortgage whereby the seller of a property is assisting the purchaser to his or her mortgage payments."
It announced mortgages with unconventional secondary loans on the same property will be acceptable under restricted conditions, but local lenders will be held accountable for making sure that purchaser can handle balloon payments.
Lenders and builders who had learned of Freddy Mac's and Fannie Mae's policy statements were outspoken in their disapproval.
"It's ridiculous, overly conservative and bad for housing," said the president of a major S&L in the District. He asked not to be named for fear of bad relations with Freddy Mac.
"The two (corporations) ought to be coming up with solutions for comsumers and builders, not hitting us in the neck," he said.