It's officially under study and open for public comment, but the script is set: Within the next 60 to 90 days, federal financial regulators will unveil the mortgage plan they've designed to dominate U.S. housing for the remainder of the 1980s.
The new mortgage -- which as yet has no name or catchy acronym -- could very possibly be the loan vehicle that you'll use when you buy your next (or first) home, so it's worth looking at in advance.
The key to the plan is its combination of loan features considered important in an inflationary era by U.S. mortgage lenders, on the one hand, and consumers on the other.
For lenders, the plan guarantees protection against the sort of financial losses they're currently taking on the billions of dollars in low-yielding, fixed-rate loans they wrote in the 1970s at 7 to 10 pecent.
Banks and savings and loan associations across the country say they'll never lock themselves into 25-year and 30-year loans that carry fixed fates -- as long as volatile money market costs jump by 5 percentage points in a matter of months. Major lenders in San Francisco, Los Angeles, Denver, Chicago, New York, Baltimore, Washington and elsewhere virtually have pulled out of the conventional home mortgage market, and some are writing only high-rate second mortgages at 17 and 18 percent. Or they're offering home buyers nothing more than one-year to five-year "renegotiable rate" loans.
Under the forthcoming mortgage approach, lenders will be able to provide consumers 30-year loans but also could get effective interest rate yields that keep pace throughout the course of the mortgage with prevailing conditions in the market.
The key feature of the plan for consumers if that, unlike "variable rate" or renegotiable mortgages in current use, the new federally sanctioned mortgage will keep monthly payments steady for long periods of time, just like a fixed-payment loan. It will also guarantee that when and if payments are increased, out-of-pocket monthly increases to the consumer would never exceed 5 to 7 1/2 percent in a year.
In other words, the $700 per month a home buyer would owe on a new 25-year, $60,000 loan at 13 1/2 percent would stay the same for an initial period -- like the first two or three years of the mortgage -- even if money market costs went sky-high during those years.
And then the maximum allowable increase over a year on the home buyer's monthly payment would be about $52.50 (7 1/2 percent of $700), which could take effect only at the end of the initial two- or three-year period. If money rates declined during those initial years, the revised money payment would drop, with no limit on the amount of the decrease.
The initial-level payment feature would give buyers a reasonable amount of certainty regarding out-of-pocket monthly mortgage costs in the early years after their purchase. The plan would limit future payment changes to an agreed-upon schedule, like once a year, and would "cap" the maximum increase at any one time to 7 1/2 percent beyond the amount the homeowners already were paying.
During the third year of a $60,000 loan at 13 1/2 percent, for instance, the monthly payment might rise to $752.50. If money market rate jumps justified another 7 1/2 percent maximum increase in the fourth year, the revised payment would be $808.94. There would be no cap on the size of decreases, when and if they occurred.
The new mortgage has been in the design stage for the past six months at the Federal Home Loan Bank Board and the Office of the Comptroller of the Currency, with heavy assistance from the country's largest mortgage lender, the Federal National Mortgage Association and banking industry trade groups. The bank board asked for public comment on certain elements of the plan Feb. 27 and is expected to issue regulations sometime in April.
The only potential area of significant controversy concerns what is known as "negative amortization." Since the new mortgage will carry a flexible interest rate plus level monthly payments with periodic increases "capped," there is the theoretical possibility that a borrower's principal debt to a lender could grow during the term of the mortgage rather than decline.
In other words, the $60,000 mortgage you get from a bank today could turn into a $65,000 principal debt 10 years down the road if rates rose very sharply, even though you'd been paying the lender steadily throughout those years.
Computer analyses of mortgages written since 1978 by the nation's largest S&L -- California's Home Savings Association -- suggest that even with rates going from 12 to 15 1/2 percent over a 2 1/2 period, the typical borrower under the new plan would experience no real increase in principal debt.
Of course, the mere possibility of "negative amortization" occurring could add to consumers' shivers when they sign on the dotted line for a home loan during the next five years. But the rationale of the new mortgage plan is that the only thing that could cause negative amortization is runaway inflation and that the consuming public -- along with lenders -- ought to share the risks of rising rates.