The Washington mortgage market, dominated for years by S&Ls and banks that mainly make loans to home buyers, is fast becoming a financial bazaar for consumers with special needs.
Federal regulation of lending institutions, greater competition from personal finance companies and the prospect of higher profits are encouraging lenders to offer a variety of untraditional real estate financing plans.
"Buy-out loans," for example, can't be found on the typical list of services offered by local savings and loan associations. Most people -- including S&L executives -- probably have never even heard of buy-outs, yet they represent one of the fastest-growing types of loans offered by a subsidiary of Washington's largest S&L, Perpetual Federal.
Buy-out loans are designed for people getting divorced, or splitting up after living together and jointly owning a house or other property. Rather than having to sell the house to raise sufficient money to compensate one of the owners for his or her share, couples can now cash in part of their equity via a buy-out mortgage.
It works this way: The existing first deed of trust or mortgage on the house remains intact, but a specialized lender provides a second trust large enough to cover the departing individual's share of the equity.
In the case of a married couple whose home would sell for $100,000 and has a $50,000 first mortgage on it, a buy-out lender could offer a second mortgage of $25,000 -- enought to handle an equal division of the $50,000 equity. The departing spouse would put the $25,000 settlement in his or her pocket.
The remaining spouse would take over sole ownership of the house, and would have to cover the monthly payments on the first mortgage as well as the second. hAny future profits from the sale of the house would go to the remaining spouse.
This kind of loan has been available from consumer finance companies and small-scale second mortgage brokers for years, but only very recently have become part of the product line of major thrift institutions and banks scattered around the country.
Perpetual Financial Services of Maryland, Inc., a Bethesda subsidiary of the District-based Perpetual Federal S&L, will make buy-out second loans with 10-year terms to qualified homeowners in Maryland and Virginia at 16 percent plus two points. (The District's 15 percent usury limit on real estate loans for non-business purposes has kept Perpetual and other lenders from making many buy-out loans on property in the city).
Charles Falck, manager of Perpetual's special finance subsidiary, says the rising demand for buy-outs here represents "an unfortunate sign of our times -- but also a very real financial need." With divorce rates soaring and co-ownership of homes among non-married individuals sharply on the upswing "this is obviously going to be a need for sometime to come," Falck believes.
The 16 percent rate is one percentage point higher than what the corporation charges for home improvement loans, but about average for buy-outs offered by second mortgage brokers around the area.
Other specialized real estate loans offered by Perpetual's subsidiary include:
Purchase money seconds, which are designed to cut home buyer's cash down payments (15 percent plus two points).
Bridge loans of six months duration, which are designed to finance a new home while the old house is being sold in today's slow resale market (16 percent plus two points).
Debt consolidation (16 percent plus two points).
High-risk business loans secured by second mortgages on prime residential property (17 percent plus two points).
Elsewhere in the metropolitan market, buyers or investors looking for specialized types of real estate financing might be interested in these offerings:
Small-scale, rental property investment finance at 12 1/4 percent, 10 percent down; $120,000 to $170,000 maximum loans. The 12 1/4 percent rate, which is at least two percentage points below the prevailing cost of investor mortgages, is available through bankers who deal with the Federal Home Loan Mortgage Corp. The federal corporation has a special program aimed at encouraging investment in urban areas through purchase of two- to four-unit properties, such as duplexes, town houses and small apartment buildings.
If the purchasers agree to live in one unit and rent out the others, they can qualify for these cut-rate terms. The mortgage banking firm of Molton, Allen & Williams is the highest-volume broker in the Washington area for the two- to four-unit program.
Condominium and investor loans with 10 percent down, at 13 percent plus 2 1/2 points, up to $150,000. The B. F. Saul Co., which offers these on Virginia properties, says the demand for condo loans is heavier than any time in recent memory because of the rapid appreciation of resale units.