The undeniable influence of mortgage financing on the nation's housing market has been demonstrated once again.
During the past 12 months, housing starts and sales throughout the country have followed the rise, fall and current rise of mortgage interest rates in an inverse ratio. When rates rise, housing starts and sale fall; when rates decline, starts and sales increase.
The upward surger of long-term mortgage rates was exceptionally acute in the latter third of the 1970s. A downturn provided a breathing period in the late spring and early summer of 1980. Now rates in most areas are around 13 1/2 percent. If housing sales decline and demand for mortgages falls off, then rates may moderate again before the end of this year.
Meanwhile, the use of FHA and VA financing has increased -- principally because those rates tend to be below market and thus more attractive to purchasers. Although discount points make up the difference, those points (actually a percentage of the mortgage loans paid at settlement) are mostly paid by sellers. Federal regulations limit the cost to the purchasers to 1 point.
One point is 1 percent of the mortgage total. In recet weeks, with the FHA-VA rate ceiling lagging considerably behind the market rate for private, conventional (nongovernment insured or guaranteed) loans, home sellers and builders have been faced with a payable point spread of 8 to 10. In some cases, promises or commitments for FHA and VA loans had been made earlier at a far lower point cost to sellers and builders.
When the commitment is kept after the mortgage market rate rises and the FHA-VA loan ceiling remains lower, the mortgage makers are caught in a costly squeeze. Some have tried to renegotiate the point terms; other have used delaying tactics to avoid going to settlement.
Other mortgage bankers have fulfilled their obligations in the hope of holding the new mortgages in a limbo-like warehouse. They pray that a downside change in the market will soon make the mortgages more valuable from a point of yield and thus provide a lesser loss in reselling in the secondary mortgage market.
Few loans are held by originators. Most mortgages are made to be sold in a secondary market to obtain funds to make more mortgage and to benefit from origination fees on new loans and servicing fees on loans resold to secondary market investors. Major secondary markets are provided by the Federal National Mortgage Association, the Government National Mortgage Association and the Federal Home Loan Bank Board's Mortgage Association. Those secondary market buyers have come to be known as Fannie Mae, Ginnie Mae and Freddie Mac.
Statistics gathered by Advance Mortgage Corp. show that FHA and VA mortgages for sales of new and existing houses in this area increased in 1979 as compared to 1978 and rose again in the first two quarters of 1980.
Incidentally, Advance is the mortgage lender that plans an experiment with the shared-appreciation mortgage, which some astute observers regard as a possible major breakthrough of the 1980s for buyers to handle the high-cost money market.
Simply, the lender gives a below market mortgage rate to the purchaser for an equivalent percentage of future profit of appreciation in the value of the house. Obviously, a lower rate means a lower monthly payment and thus enables more persons to be eligible for ownership.
In turn, the owner pledges to give up an equivalent proportion of profit when the house is sold.
Prospective buyers of new houses also have an opportunity to obtain mortgage financing at rates below the mark level, mostly from builders with large operations. In order to sell their homes competitively, these builders have paid to obtain forward commitments on mortgage money.
In effect, this device enables the buyer to get financing at a rate below market. Of course, the builder pays a price for the mortgage that makes the house easier to sell. Usually, that cost becomes part of a higher price.
Making homeownerhip more affordable is the goal of Baltimore Federal Savings & Loan Association, which recently introduced a "pledged account mortgage," a private, graduated payment program through the first five years of ownerhip. The lower mortgage payments during the early years are supplemented by a pledged savings account, funded by a portion of the buyer's down payment and earning 5 1/2 percent interest while also being used as collateral. The theory is that the lower initial monthly payments enable more persons to qualify for ownership.
In Maryland, the state's community development administration has a homeownship program that provides mortgage loans at 9 1/2 percent for moderate-income families. Mortgage funds are raised through the sale of revenue bonds.
For instance, the Frederick Heights town houses, just went of Frederick, Md., on Hillcrest Drive, has received a commitment for this 9 1/2 percent financing for 10 dwellings. Prices average aout $52,450.
Minimum family income allowed for buyers is $24,000, depending on family size. the Maximum income allowed is $29,000. The state lending program also covers existing houses priced up to $55,000, with rates being $10 1/2 or 11 percent.
In Montgomery County, the Housing Opportunities Commission has an affordable homeownership program with mortgage rates of 8 7/8 percent. This program also is financed by the sale of revenue bonds.
James Welu, financing program manager of the HOC, said that there are funds available for approximately 200 more mortgages on homes (priced up to $65,000) in subdivisions where builders have qualified for the financing. uMost of the dwellings are town houses in the Gaithersburg-Germantown areas. The maximum eligible income for a family of five is $31,600. Virginia Housing Development Authority to provide mortgage financing for some lower-income buyers. The authority office in Richmond said that 1,360 dwellings, including 157 so far this year, have been financed since the below-market-interest program was begun in 1972.
In Fairfax County, a second trust is financed by the county's housing office to enable qualified buyers with low-to-moderate incomes to obtain houses. However, the high cost of housing in that area and above-average incomes often rule out eligibility under the program for many prospective buyers.
But the Fairfax County Redevelopment Housing Authority did arrange financing for a 100-unit cooperative -- the Island Walk community in Reston -- and has set up financing for a section of rehabilitated cooperative dwellings called Yorkville in the City of Fairfax.
A new federal subsidized loan program has been adopted by Washington-Lee Savings & Loan Association, which has 23 offices in Virginia. However, the maximum sales price of the home for low-income buyers is mandated at $38,000 -- thus ruling out most of the available housing close to Washington.
Ralph Falcone, senior vice president of Washington-Lee, said that the S&L expects the program to attract eligible buyers in areas served by its offices in Leesburg, Tappahannock, Fredericksburg and Warrenton.
Other locally supported mortgage-assistance ownership programs are available in Alexandria and the District. Programs are designed to aid households with minimum incomes to become owners of residences with little or no down payment and at interest rates below market. In the District, for instance, loans requiring no down payments are available under the housing purchase assistance program. So far, 207 families have been assisted with second trust, deferred interest loans to enable them to buy homes with average total mortgages of $41,000.
If homeownership is to be extended to new buyers in the low- and middle-income brackets, the only alternative to current high conventional mortgage rates seems likely to be in FHA or VA financing programs on the national level and the use of state and local housing finance programs supported by revenue bonds or grants. However, legislation to restrict the use of revenue bonds for mortgage assistance has passed the House but has not yet been endorsed by the Senate.