The State of Maryland's innovative move to pump public pension funds into the sagging housing industry should make more loan funds available but it apparently will do nothing to lower mortgage interest rates.
Virtually all pension funds, whether they cover workers in government or private industry, are required by law to be invested at the highest but safestrate of return. According to pension experts, that means mortgages financed by pension funds will have to be issued at full market rates unless subsidized by some other agency.
In Maryland, that other agency is going to be the homebuilders. The state employes' retirement system will earn 16 percent interest on the $20 million it provided earlier this week to Loyola Federal Savings and Loan Association of Baltimore. Loyola plans to issue mortgages at 13 1/2 or 15 percent. The builders who obtain the financing commitments will have to buy down the difference.
Public and private pension funds, which control about $600 billion in assets, have traditionally been reluctant to invest in home mortgages, which require a knowledge of local real estate and are hard to resell. The President's Commission on Housing has recommended that pension funds be tapped as a source of housing capital, and the Maryland program announced this week by Gov. Harry Hughes is the first in the nation to go under a new financing system devised by the Federal National Mortgage Association.
According to Thomas R. Marvel Sr., Loyola vice president, and officials of Fannie Mae, the pension-loan program will work this way:
Loyola, the state's largest federally chartered S&L, with seven offices in Montgomery and Prince George's counties, will issue about 350 mortgages, with a total value of $20 million, to buyers of new homes in the state. By prearrangement, Loyola will then notify Fannie Mae, which in turn will sell $20 million of marketable, federally insured securities, to the Maryland state pension system, and return the money to Loyola. As the home buyers make their monthly payments, the pension system will be repaid, at 16 percent annual interest.
Marvel said the mortgages will be for 30 years, with the interest rate rengotiable after every five.
"In no way is the retirement system subsidizing the home buyers," Marvel said. "We are guaranteeing the pension fund a 16 percent return, and charging 15 or 13 1/2, and the difference has to be made up through discounts or points."
While 350 mortgages will do little to assuage the ills of Maryland's housing industry, state officials made clear that because the new Fannie Mae securities involve no risk, they expect state, county and local pension funds to make substantial further investments in them. Because the securities are Federally guaranteed, they do not carry risks such as the New York State Teachers' Retirement system incurred with its ill-fated investement in the Rockville Mall.