The most powerful people in the American mortgage market are working overtime to put the final nails in the coffin of the fixed-payment, long-term home loan -- the device that millions of consumers have used as an inflation hedge.
The federal regulators of the nation's mortgage lenders are now moving more rapidly toward elimination of the traditional home mortgage than most buyers and sellers recognize.
They're also taking new steps to ensure that long-term, fixed-rate loans made to consumers can be easily converted into higher-rate mortgages, despite the growing number of state laws designed to discourage such actions.
Proposals unveiled here last week amount to a major push by government toward creation of a uniform, national variable payment mortgage that is so attractive to lenders that few will resist. Thanks to these and other efforts under way, home buyers and sellers may well discover that 1981 will be the final year in their lives when traditional fixed-payment loans are readily available in the marketplace.
On the surface, last week's announcements by the Federal Home Loan Bank Board and the Federal National Mortgage Association ("Fannie Mae") didn't sound terribly significant.
The bank board, which sets the business rules for many of the nation's largest home lenders -- savings and loan associations and savings banks -- said it was considering some corrective changes in its "renegotiable-rate" and variable-rate mortgage regulations.
Simultaneously, Fannie Mae announced a new program of "refinancing" loans in its investment portfolio, and noted its intention to enforce the so-called "due on sale" clause.
To understand the real meaning of last weeks's announcements, though, you have to look at the details of the plans, and see how they fit into the mortgage industry's blueprint for the future.
Fannie Mae, a congressionally chartered but privately run corporation, is the largest source of capital for American home buyers. It wons $56 billion worth of mortgages, and purchases about one out of every 20 home loans made across the United States by mortgage companies, banks and S&Ls. Homeowners whose mortgages are in Fannie's vast portfolio often have no idea of that fact, since their original lender continues to collect monthly payments on Fannie Mae's behalf.
Like many lenders this year, Fannie Mae has lost money on the fixed-payment, long-term mortgages in its portfolio that carry rates of interest from 7 to 12 percent. Fannie's top officers would love nothing more than to bail out of the fixed-rate mortgage business permanently, and buy only loans whose rates can be adjusted to the inflationary swings in the capital market.
But Fannie Mae can't do that. There aren't enough adjustable-rate loans being written around the country yet to satisfy its potential appetite. Those loans that are being made with adjustable rates lack the sort of uniformity that a huge investor like Fannie requires.
So the corporation has devised a three-pronged strategy to protect itself:
First, it is pushing federal mortgage regulators to agree quickly on a single, nationally uniform, adjustable-rate loan format, to be introduced as early as possible in 1981.
Second, it plans to get tough with consumers on the politically sensitive "assumability" issue. Any loan purchased by Fannie Mae after Nov. 10 this year will not be assumable by a subsequent borrower at the original rate. The corporation will strickly enforce the "due on sale" clause contained in every standard fixed-rate loan.
If the original borrower tries to pass on his mortgage to a purchaser of his home via a straight assumption, a back-door "wraparound" or a contract-for-deed sale, Fannie will demand immediate payment of all debts due, thereby killing the sale.
In states where legislatures or courts have moved to ban or limit excercise of "due on sale" -- such as California, Colorado, Illinois and Washington -- Fannie Mae won't buy any new loans after Nov. 10 that don't contain a seven-year "call" option. In effect, FNMA will only purchase short-term, seven-year loans in those states.
Finally, the corporation will "refinance" certain loans currently in its portfolio at what may be an attractive interest rate. Homeowners who plan to sell their property, and who learn from their original lenders that their mortgage is owned by Fannie Mae, can offer a special financing option to purchasers: a new conventional loan from Fannie Mae at a slightly below-market interest rate.
This should encourage homeowners with low-yielding 7 percent to 11 percent loans to sell their properties, and get their mortgages off Fannie Mae's ledgers sooner rather than later.
The Federal Home Loan Bank Board's actions last week were part of the same blueprint. The board said it plans to join with the Comptroller of the Currency -- the regulator of the nation's commercial banks -- to work on a standard, adjustable-rate loan package that will be the same everywhere in the country. It also proposed doubling the maximum rate jump permissible in its adjustable-rate loan, making such mortgages doubly enticing to lenders.
Like it or not, 1981 will signal the true start of the adjustable rate era for American mortgages. That 8 percent, fixed-rate loan you got five years ago will look like something out of the Pleistocene era.