A major new mortgage financing program designed for individual home sellers can be turned into profit this summer by sharp home buyers and real estate investors.
The Federal National Mortgage Association's (Fannie Mae) "home-seller second mortgage" program--detailed in this space last week--offers important opportunities for anyone who knows the rules, no matter what side of a transaction he or she is on.
The program essentially provides sellers and owners of houses across the country a dependable cash outlet for second mortgages or deeds of trust.
Rather than having to hold on to the three- to five-year deferred payment "purchase money" loans many sellers must extend to buyers, the sellers can now convert them to cash in a national marketplace.
Working through local lenders, Fannie Mae will purchase "creative" second mortgages and deeds of trust up to $107,000 that are originated during home sales. The cash price Fannie Mae pays will depend on the interest rate of the loan; the lower the rate the seller charged the buyer, the lower the cash price Fannie will pay the seller.
When the transaction is completed, the sellers will have money in their pockets rather than an I.O.U. for $30,000 or $40,000 from the family that just bought their house. The sellers will also be off the hook legally--in the event of default, it will be Fannie Mae's headaches and lawyer's bills, not their's.
That's all good news for home sellers, you may say, but what about purchasers looking for a house? And what about investors? What's in the new second-mortgage program for them?
Plenty. Let's start with home buyers. Say, for instance, that you've been searching the market for months for the right house or condominium. You've found two or three that fit your needs, but none of them carried affordable financing. The sellers were absolutely unwilling to do anything "creative." They didn't want to offer a second mortgage, even with a short-term balloon-payment requirement, and wouldn't even discuss such things as interest-rate subsidies or "buy-downs."
They'd read headlines about the perils of seller-financing, balloons coming due and bursting, courtroom fights between sellers and their buyers, and the like. They were frank with you about it: we're just not prepared to help you finance what we're selling, they said. We want a good, old-fashioned conventional sale, where a bank pays us all we're due at settlement, and you carry the ball from then on. Otherwise we're not selling. Period.
What do you do with sellers like these? For starters, head right back to them with your real estate broker. Show them how they can now take back a purchase-money second mortgage big enough to enable you to buy their house. They can dispose of that loan for cash immediately by selling it to an institution very much like a bank: Fannie Mae in Washington, with $62 billion in assets.
Let's say the sellers have a $50,000 VA loan at 12 percent and want $95,000 for their house. You've got to come up with $45,000 to assume the 12 percent loan and meet their asking price. But you can only put together $20,000 from your savings and a little help from relatives.
The Fannie Mae solution to your problem could work like this: You persuade the seller to loan you $25,000 at 13 percent for 15 years by way of a second mortgage. The loan would be written with the help of a mortgage banker (or other lender who regularly deals with Fannie Mae), and would carry low monthly payments because of a 30-year amortization schedule. There'd be a lump sum balloon payment at the end of 15 years.
The local lender would sell the loan "paper" to Fannie Mae and hand over the discounted proceeds (say $21,000 to $22,000) directly to your sellers.
The total cash your sellers receive--your $20,000 payment plus the $21,000 to $22,000 loan-sale proceeds--would be slightly less than the $45,000 they had originally wanted. But it would probably be the best package deal they'd been offered in weeks or months, and they might well jump at it.
How does the arrangement stack up from your perspective as the buyer? Figure it out. You get the house you wanted. You get an assumable 12 percent first mortgage and a 13 percent second. You get $75,000 worth of fixed-rate financing with payback terms of at least 15 years. That's hard to beat in a credit-crunched market like 1982's.
The same Fannie Mae program can work for real estate investors--either as owners, buyers or sellers. For a rental house or duplex investor in need of second mortgage financing on a new purchase, for example, Fannie will provide up to $107,000 (but the combined total of existing first and second mortgages on the property can't exceed 70 percent of assessed value).
For an investor looking to raise cash to finance a down payment on a new property--or to invest in some other business venture--Fannie Mae will invest up to $107,000. If the real estate the investor is borrowing against happens to be his or her home, the combined first and second mortages can total 80 percent.
(For more information on Fannie Mae's expanded second-mortgage program, contact your local bank, S&L or mortgage broker. If they're in the dark about it--since it only began June 1--ask them to contact Fannie Mae in Washington.)