The company that owns more American homeowners' mortgages than anybody else -- $52 billion worth on 2 million homes across the country -- is jumping into creative real estate financing with a big splash.
Fannie Mae, the Federal National Mortgage Association, wants its customers to turn in their old mortgages and get new, bigger ones at interest rates 2 to 4 percentage points below those prevailing in the regular market today. It held a press conference here last week to unveil its new discount-rate "refinancing" program and kicked off a national publicity campaign aimed at realty brokers, lenders and the general public.
But Fannie Mae's new offer, seductive as it is at first blush, isn't for everyone. Here are the facts, without the publicity hype:
Fannie Mae is a congressionally chartered, privately run corporation that is in serious financial trouble. Nearly nine out of 10 of the long-term home mortgages in its investment portfolio bear interest rates under 10 percent -- a losing proposition in today's financial market.
Part of Fannie Mae's problem comes from its long specialization in purchasing FHA and VA home loans. Every one of these government-backed, fixed-rate mortgages is assumable by home buyers at its original rate. That means that an 8 percent VA loan written five years ago on a house in your neighborhood could be passed on from successive seller to buyer until the year 2006 -- 25 years from now.
Another part of Fannie's problem comes from its traditional refusal to raise interest rates on conventional (non-government-backed) mortgages in its portfolio when new buyers assumed them, despite Fannie's legal right to raise the rate.
To get its ledgers back in the black, Fannie Mae has tried a number of reforms recently, but the latest step is unquestionably its biggest and most important.
In a nutshell, it amounts to this: If you are one of the 2 million owners of homes with Fannie Mae mortgages, you now can pull thousands of dollars of equity out of your property -- converting your inflationary profits into hard cash -- by terminating your old, low-interest-rate loan and asking for a new, bigger one. This is known as the Fannie Mae discount-rate "refinance" program.
Or, if you're a potential buyer of one of those 2 million homes, you can get a new, below-market-rate mortgage from Fannie Mae, provided the seller agrees to terminate the existing loan on the house. This is known as the discount-rate "resale finance" program.
The interest rates on the new mortgages -- either for homeowners refinancing and staying where they are or new buyers coming in -- will be quoted on a case-by-case basis by local lenders. And they'll sound inviting. Let's say you're the owner of a home with a 9 percent, $40,000 FHA mortgage on it. You check with the local lender who originally gave you the loan and learn that Fannie Mae owns it. Assuming your property is now worth at least $90,000, you can "refinance" your house with a new $80,000 convertional loan carrying a 12 3/4 percent rate through Fannie Mae. You pay off your $40,000 FHA mortgage and put over $35,000 into your pocket. You can use the money for investment, a second home, the kids' educational costs or whatever.
As a cash-producer, it's a good deal. But you ought to face the other financial facts aobut such a transaction before plunging in blindly.
Part of the cash ou thought you'd be getting is going to be eaten up in "origination" fees and other up-front costs. Fannie Mae is allowing local lenders to charge you 3 percent of the new loan amount -- $2,400 on an $80,000 loan, for example -- for the privilege of handling the refinancing. On top of that will be added other, highly variable lenders' charges and fees for document preparation, appraisals, surveys and credit reports, plus recordation taxes in some parts of the country.
A chunk of your cash, in short, will be eaten up before you get it. That's true with any refinancing, but the discretion Fannie Mae is allowing local lenders in setting charges could make its refinancings more expensive than you could find elsewhere in a competitive market.
The 12/3/4 percent rate on your refinanced home also looks good at first glance, but it carries a price tag, too: Your monthly out-of-pocket mortgage payments will jump from $322 to $870. Moreover, your new loan will not be assumable by subsequent buyers, unlike the low-rate loan you killed.
That could affect the salability of your home a year or two down the road and force you to accept a lower price than you'd be able to get with a "9 percent assumable FHA" loan advertised on the house.
The point of all this for smart owners, buyers, sellers and brokers is to take a hard look at Fannie Mae's new refinancing programs and tote up the true costs for everyone involved. Shop around at competing lenders; many banks and S&Ls, for instance, are refinancing low-rate mortgages at deep discounts and may offer better packages than Fannie.
If Fannie's offer comes out on top -- and it very well may -- grab it. Otherwise, resist the hype.
(For information on whether your home, or a seller's property, qualifies for Fannie's new programs, contact the local lender who collects the monthly mortgage payments. For more details on the programs themselves, write to FNMA, 3900 Wisconsin Ave. NW, Washington D.C. 20016.)