A major new financing opportunity has just opened up here that will mean millions of dollars a month of hard cash for alert homeowners and sellers across the country.
The largest investor in American housing--the Federal National Mortgage Association (Fannie Mae)--has decided to buy a wide range of second mortgages and deeds of trust, including creative-financing "take-backs" provided by individual home sellers to purchasers.
It will also now buy unlimited numbers of "home equity" second loans--the type that a growing number of families use to finance college educations, business ventures and large consumer purchases.
In practical terms, Fannie Mae's decision means that, as of last Tuesday:
* Sellers who'd otherwise have to hold a second trust or mortgage for several years will be able to turn it into cash--and get out of the transaction--almost immediately. An estimated one out of three sellers in 1982 have to take back "seconds" to help their purchasers, so Fannie Mae's program has the potential to touch tens of thousands of people a month.
* Homeowners who need to raise cash will be able to do so more easily--without selling their property--by way of a home-equity second deed of trust or mortgage. Fannie Mae's nationwide network of participating lending institutions will be retail outlets for equity loans up to $107,000. Current rates quoted by Fannie Mae are just over 16 percent, making an equity loan one of the cheapest and biggest souces of cash available to most homeowners.
* Buyers and brokers who know about Fannie Mae's "seller-financed second loan" program should be able to come up with more persuasive contract offers to persuade reluctant sellers. Homeowners who refuse to take back a second in lieu of cash, for example, can now be mollified. They can get their cash out of the house. But it will be from Fannie Mae in Washington rather than directly from the purchaser.
Here's how the new second-mortgage programs can work for you, depending on whether you're an owner or buyer:
If you're a homeowner planning to sell your house this year, get in touch with a local mortgage banker, savings and loan association or other lender who is approved to do business with Fannie Mae. Your real estate broker or lawyer can make the initial contact if you'd prefer.
Explain to the lender that you're prepared to offer a qualified buyer a deferred-payment second trust or mortgage, and want to know the size, payment terms and costs involved with a loan suitable for purchase by Fannie Mae.
(You should understand, by the way, that the local lender will be a middleman between you and Fannie Mae. The lender will originate the loan on standardized forms provided by Fannie. It will then sell the loan to Fannie Mae, and provide you the discounted proceeds of the sale in cash. The local lender will continue to handle collections on the loan, but you'll be out of the picture.)
The maximum size of the "seller take-back" loan you'll be able to offer a purchaser will be determined in part by the existing indebtedness on the house. If your buyer plans to live in the house full-time, the combination of the existing first loan and the new second loan can't exceed 80 percent of the value of the property. For example, if you've got a $50,000 assumable FHA loan and your house is worth $100,000, Fannie won't buy anything bigger than a $30,000 second mortgage from you.
Bear in mind, too, that the lower the interest rate on your seller take-back loan, the less Fannie Mae will pay for it. If you give your home buyer an 11 percent rate, Fannie will have to discount it--charge you cash out of the proceeds--to bring the effective yield up to the current 16 percent-plus required level.
Now let's say you're in a different position: You're a homeowner in need of cash to pay off bills, or to finance a business venture.
Under Fannie Mae's new policies, you'll probably find a larger number of lenders in your community willing to make an equity loan to you this summer. In particular, mortgage bankers--who had stayed away from Fannie's old-home equity-loan program--should be eager to talk with you. So may consumer-finance companies, banks and S&Ls, among others.
With more competition in town, prevailing rates should become more competitive in short order. If local lenders or brokers have lately been charging 19 and 20 percent for home-equity loans in your area, for instance, the presence of Fannie Mae's 16 to 16 1/2 percent quotes in the marketplace should help nudge rates down.
The procedure to follow for equity loans is similar to seller-financed seconds. Call up a participating lender and fill out the required credit forms. If you've got an expensive house and Fannie Mae doesn't own your first mortgage, you could qualify for as large as a $107,000 second mortgage with a 15-year payoff term. If Fannie already owns your first mortgage--which is a distinct possibility, since it owns one of every 20 American home loans--the maximum amount will be lower.
NEXT SATURDAY: More Creative Financing with Fannie Mae.