The largest source of mortgage money for America's home buyers is about to turn into a huge capital source for homeowners, business executives, investors, rehabilitators, parents of college-bound children and home sellers.
Fannie Mae -- the Federal National Mortage Association -- hasn't announced it yet, but it's on the verge of plunging into the "home equity loan" market.
When it does, probably this fall, it could become the dominant national force in a market that traditionally has been localized, and occasionally controversial.
It also could become a key source of money for you -- if you're informed about it. Here's the story:
Fannie Mae is a congressionally chartered, privately run corporation that buys mortgages originated by local banks, mortgage brokers, savings and loans and other lenders. It has $52 billion worth of American home loans on its books, many of them on properties whose owners have never heard of Fannie Mae.
Because local lenders who sell loans to Fannie continue to "service" them -- kcollect the monthly payments, send out statements and the like -- many homeowners across the country don't realize the identity of their true mortgage lender.
Fannie always has limited its investments to first mortgages and deeds of trust, the primary financing vehicles for home purchases. It never has ventured into the rapidly growing second-mortgage and deed-of-trust field, in part because it lacked a green light to do so from its federal regulator, the Department of Housing and Urban Development. That changed last week, however, when HUD signaled its approval.
What that means to consumers, according to officials at both Fannie Mae and HUD, could prove to be very significant.
Although the details still are being worked out, Fannie Mae hopes to inform local lenders during the coming several months that it will purchase home equity loans for the first time in its history. Home equity loans are mortgages or deeds of trust that represent second liens against a home -- that is, in the event of a doreclosure, they get paid off after the first mortgages or deed of trust.
"Seconds" are used by borrowers for a wide variety of purposes:
They are one of the most popular forms of creative financing in connection with home purchases in a high-interest-rate, high-cost market like today's. For example, a short-term second mortgage or deed of trust from either the seller or an outside lender fills the gap when a buyer can't come up with the cash required to assume an existing loan.
They are an increasingly common source of cash for homeowners who want to tap into their inflation-fed equity to help finance a large purchase such as a piece of vacation property, a car or a boat.
They can be used to finance a business investment, a college education, an addition to a house or virtually any other major expenditure.
According to lending industry estimates, between $15 billion and $20 billion worth of home equity loans were made nationwide in 1980, up from an estimated $3 billion to $4 billion in the mid-1970s.
With Fannie Mae providing a new, easily accessible source of capital for such loans, the volume could double within a few years.
A Fannie Mae providing a new, easily accessible source of capital for such loans, the volume could double within a few years.
A Fannie Mae oficial estimated the corporation alone could finance $5 billion worth of second loans a year "if consumers saw the potential and really liked our program." The same official said that Fannie Mae's entry into the market also could pressure states such as Texas -- whose housing finance laws discourage second-mortgage lending -- to revise their positions. In states where seconds already are used widely, such as California, "the effect will be to expand the market even further and attract more borrowers to federally regulated lenders" such as banks and S&Ls which sell to Fannie Mae.
Fannie Mae's new program will provide relatively liberal terms and a wide variety of payback terms. The owner of a $100,000 home with a $60,000 existing mortgage, for example, might be able to borrow an additional $30,000 for home improvement or investment purposes via a 15-year second mortgage financed by Fannie Mae.
The interest rate would be fixed for the full term of the loan, and mortgage insurance probably would be required for mortgages that expose Fannie Mae to higher risks of loss.
(To get on Fannie Mae's mailing list for its future announcement of its second-mortgage program, write to the Office of Corporate Affairs, FNMA, 3900 Wisconsin Ave. NW, Washington 20007.)