If some powerful people on Wall Street have their way, the home loan you and many I other consumers have come to know in the 1980s will offer several new intriguing features:
* A fixed interest rate, probably 2 1/2 to 3 percentage points below the regular market rate prevailing when you apply for it.
A 30-year guaranteed term, but capable of being paid off in 11 to 12 years.
Encouragement of a return to home buyers' non-inflationary investment patterns common in the 1950s and 1960s, promoting increased savings and discouraging excessive, additional borrowing.
The new loan--currently being readied for national introduction in 1982--is called the "growing-equity mortgage."
Merrill Lynch, the financial services behemoth, will be the first to hit the real estate market with the concept, probably within the next 60 days. But Merrill Lynch's bullish views about the idea are raising eyebrows elsewhere in the mortgage industry. Competition next year from other major financing sources is a virtual certainty.
Conceived earlier this year by a San Antonio insurance company executive, Michael Roth, the growing-equity mortgage attempts to "rebalance the housing-finance equation," in his words. "It says to everybody involved in a mortgage transaction: Let's spread the burden of future inflation more fairly than we've done for the past 12 years."
"Let's not load all the costs onto the consumer--which is what every mortgage on the market today tries to do. By the same token, let's not ask the lender or investor to be an utter idiot either, like we did in the late 1970s. Lenders were stuck with returns that were half the rate of inflation, and it put them in deep financial trouble."
Roth's risk-sharing solution for the 1980s is a hybrid. Its below-market mortgage interest rate is fixed for 30 years, but its payment schedule is not. Its payments are tied to a Commerce Department index that measures per capita, after-tax disposable income. If that national index goes up by 10 percent in a year--reflecting higher disposable personal income in the United States--a borrower's annual payments will go up by 7 1/2 percent (75 percent of the 10 percent index jump).
Unlike other adjustable-payment loans, however, every extra dollar that borrowers are asked to pay beyond their original monthly payment schedule goes toward reduction of their principal-debt balance, not to interest.
That speeds their repayment of capital to the lender, and helps them accumulate equity far faster than under conventional mortgage plans.
To see the contrast, consider this example suggested by Roth: A home-buying couple takes out a 14 percent loan of $80,000 on a $100,000 home, using the most common variable-rate mortgage plan available from banks and S&Ls. Let's also assume that inflation during the next 10 years does precisely what it did in the 1970s.
Eight years from today, in 1989, the couple's monthly payment would have risen by about 21 percent, from $947 to $1,375. Their equity (or capital ownership) in their house, however, would have increased by less than $2,000. Their principal debt to the lender would still be over $78,000 because the lion's share of their payment increases would have been taken away as interest. That's the way most mortgages work today. The mix of principal and interest payments is heavily biased toward interest in the early years, and heavily weighted toward principal in the later years.
Under Roth's unconventional "growing equity" concept, the same couple who took out the 14 percent, $80,000 mortgage would experience a roughly similar (23 percent) rise in monthly payments during the first eight years. But the couple would have paid off nearly half of their principal debt. They'd owe their lender $45,000, rather than $78,000. And they'd probably be able to pay off their full remaining house debt in another three to four years.
Merrill Lynch, which got the growing equity idea from Roth, thinks it's so promising that it could make a huge dent in the market in the next several years.
The combination of below-market rate, accelerating equity accumulation and payment schedules tailored to income growth "makes (Roth's idea) ideally suited to the needs of this decade," says Merrill Lynch executive William Hopkens.
"Hell, it could even bring back the old custom of 'mortgage burning,' " adds Hopkens. "Imagine paying off mortgages again rather than depending upon inflation to bail you out of your real estate debts? It's almost revolutionary!"