Federal Housing Administration mortgage insurance could be available beginning next year for innovative financing that would provide home loans at 5 percent for 20 or 30 years under an amendment the House banking committee approved Tuesday to this year's housing act.
The revision would authorize the secretary of the Department of Housing and Urban Development to operate a demonstration project expanding FHA mortgage insurance to "indexed" or "price-level-adjusted" home loans during fiscal 1983.
The HUD secretary would have to formulate regulations covering the low-interest, fixedrate mortgages by next March 31 and begin insuring the loans by Sept. 30, 1983.
Congress would have to reauthorize the project to extend it beyond that date. The secretary would be free to decide how many loans to insure and their total dollar value.
Low-interest indexed mortgages could allow up to 2 million renters to buy homes, Henry Cassidy, research director for the Federal Home Loan Bank Board, told the House Banking subcommittee on housing and community development last month.
In contrast to other plans Congress is considering to aid the ailing housing industry, this proposal would require no direct U.S. government subsidies.
"This is a significant first demonstration that the concept has validity," said Rep. Stan Lundine (D-N.Y.) sponsor of the amendment. "It will provide a demonstration that this kind of program can serve consumer needs rather than be an extraordinary consumer risk."
An indexed mortagage has an interest rate fixed at a low level for its entire term, but the principal balance is adjusted periodically according to changes in some standard index such as the Consumer Price Index.
Monthly payments would begin at a level far below those of other mortgage instruments now being offered but would increase in later years. Since the income of most people keeps pace with inflation, families would pay about the same proportion of their earnings each year for their housing costs.
With traditional fixedpayment mortgages, home buyers pay the same amount each month in "nominal" dollars while in "real" dollars -ones adjusted for inflation -they pay a steadily declining percentage of their income for their home mortgage.
A home purchaser with a conventional mortgage of $50,000 at 14 percent for 30 years would pay the same $592 per month for the entire loan period. If inflation were 10 percent a year, the homeowner's "real" dollar payments would only be $539 a month in the second year and $490 in the third.
A home buyer with a 4 percent indexed loan for the same amount would pay only $239 per month in the first year, $263 in the second and $289 in the third. In real dollars, the loan would still cost the same $239 each month.
There would also be a periodic change in the indexed loan principal the balance owed on the $50,000 adjustable mortgage would increase to $54,031 at the end of the first year and $58,326 at the end of the second.
Many states have laws prohibiting loans with this "negative amortization." The housing bill amendment would allow HUD to override these limitations, but only on the indexed loans it insures during the demonstration project period.
The only large-scale use of indexed mortgages n this country has been in Utah, where the state retirement system has funded $50 million in indexed home loans.
The Senate Banking Committee has rejected the administration's proposed reductions in fiscal 1983 funding for FHA and the Government National Mortgage Association, keeping them at last year's levels. The FAH provisions still must receive approval from the full House and Senate, and then differences in thee versions will be resolved by a conference committee.