One of the biggest suppliers of mortgage money nationwide has quietly begun a program that could open the door to home buying for thousands of economically strapped consumers. It could also open the door to profits for sharp-eyed real estate investors.
Without fanfare on Dec. 28, the Federal Home Loan Mortgage Corp.--known popularly as "Freddie Mac"--published guidelines for the purchase of "shared equity" mortgages from local lending institutions.
Shared-equity loans involve financing partnerships between home buyers and investors. They take numerous forms, but typically involve two key ingredients: prospective home buyers who can't afford the required down payment and monthly mortgage charges for the house or condominium they want to purchase. And a "rich uncle" investor who's willing to subsidize part of the buyers' costs in exchange for a share of their equity interest.
The outside investor may be a relative or a close friend of the buyers. But more commonly the "rich uncle" is an individual, a corporation, a pension fund or broker willing to loan money on innovative terms in the expectation of high returns. The returns can include significant capital gains when the resale value of the house rises sharply during the term of the agreement.
Realtors, builders and others who have had to put together unconventional financing packages to sell houses in recent months tend to know of "deep-pocket" investors in their local communities.
The major obstacle to widespread use of the shared-equity technique, however, has been with banks and savings and loan associations.
They've often been unwilling to risk their scarce capital on mortgages involving purchasers who need subsidies to pay their monthly debts.
"I don't want to give my money to anybody who can't pass our regular standards of creditworthiness," said the president of a major midwestern S&L in a recent interview. "That's why we've never gone into equity-sharing plans or anything fancy like that."
The entry of Freddie Mac into the field could produce a fundamental change in S&Ls' and banks' outlook, though.
Freddie Mac is one of the two huge, congressionally chartered corporations that dominate the so-called secondary-mortgage market. (The other is Fannie Mae, the Federal National Mortgage Association.) Both corporations buy home loans from local lenders, thereby enabling S&Ls and banks to originate still more loans.
The local lenders continue to "service" the mortgages--that is, collect the monthly payments and keep records--and receive an annual fee from Freddie Mac or Fannie Mae.
Freddie Mac's purchases of conventional mortgages in 1981 totaled close to $3 billion nationwide. Its willingness to purchase shared-equity mortgages for the first time in 1982 could convince formerly hesitant local lenders to open their windows to borrowers in need of special help.
Freddie Mac's guidelines for lenders are extremely broad. It will purchase shared-equity loans as large as $107,000 on single-family homes provided:
* The home-buyer and the "rich uncle" can pass standard credit tests for their respective shares of the debt involved.
* The home-buyer and the investor sign the note and mortgage or deed of trust.
* The investor is an individual, not a corporation, limited partnership or trust; and
* The arrangement between home-buyer and investor does not require sale of the property (or divison of the equity) earlier than seven years from the date of the loan.
The guidelines are broad "to enable consumers and investors to structure the widest possible variety of responsible agreements that suit their needs," according to William R. Thomas Jr., Freddie Mac's executive vice president.
There will be no detailed restrictions, in other words, on the mechanics of equity sharing, the allocation of tax benefits between the parties, or the calculations of who-gets-what when renovations or capital improvements are made on the house.
If, for example, a home buyer contributed 25 percent of a down payment on a house and the "rich uncle" investor contributed 75 percent, Freddie Mac wouldn't attempt to regulate how the parties planned to split their equity in future years.
If the investor was satisfied with 40 or 50 percent of the equity--or insisted on 80 percent of all future profits at resale--Freddie Mac wouldn't get involved in any way.
The essence of the program, according to a top official of the corporation, is that it treats mortgages made by local lenders to equity-sharing purchasers as investments comparable to regular mortgages.
"All we're saying in the program," commented the official, "is that soundly underwritten equity sharing can be just as sound a way to buy real estate as a traditional loan. If the people involved are good credit risks, and the property offers sound security for the loan, why not?"