The equity you're accumulating in your house could shortly qualify you for a new financial concept: the homeowner's instant "open line of credit" from a savings and loan association, tied to your stake in residential real estate.
The idea would work something like the flexible lines of credit used commonly by businesses. Rather than having to make individual loan applications to finance personal projects you wanted to undertake--such as a $14,000 round-the-world cruise--you'd simply draw on your credit line up to a predefined amount.
You'd charge it against equity stored in your home. There'd be relatively little paperwork involved. The interest rate would be similar to what business pays every day: the short-term, prime bank rate, plus one or two points, "floating" up or down with rates in the economy overall.
Unlike a regular second mortgage or deed of trust, you could add to your credit line as needed--assuming your credit continued to be good--and you could pay off your debt in irregular installments. The security of the floating loan would be your home.
No federally chartered S&L or savings bank offers a plan like this yet, in part because credit lines aren't specifically authorized by federal statute. But the man who administers the nation's S&L statute, Federal Home Loan Bank Chairman Richard T. Pratt, believes that they're legal and should be coming soon to your neighborhood.
Pratt won't divulge which S&Ls will be first to hit the market, but he's certain that the open-credit-line approach--with its ability to offer quick cash and attractive consumer-loan rates--will take off fast.
Equally important, from his point of view, it will be a key step for S&Ls toward becoming the "complete money-management" centers that he believes is essential to their financial survival.
The line-of-credit concept will be tied to residential property--the S&Ls' traditional meat and potatoes--but will take them far afield into consumer credit.
Theoretically, at least, homeowners will finance their big-ticket consumer purchases by tapping their "instant" equity-credit lines at the neighborhood S&L. They'll have access to pools of short-term capital that many of them can't touch at the moment, certainly not with the flick of a credit card.
Pratt's expansive views on lines of credit, outlined in a recent interview, are part of a larger picture he sees emerging for mortgage borrowers, home buyers and thrift institutions in the next several years.
Some of his views aren't likely to win friends in the home-building and real estate community, but they shouldn't be ignored by consumers:
* Homeowners and buyers need to face the hard economic facts about the likely profits from their investments in shelter. There is virtually no chance that the sort of double-digit increases in home resale values experienced in the 1970s will return in the 1980s or 1990s. The 1990s, in fact, could see sharply reduced demand for single-family homes, as the "grey-power" age group heads en masse for condos.
* The conditions that produced the speculative boom of five years ago, particularly the availability of finance terms that guaranteed losses for lenders, are gone forever. Home buyers, therefore, ought to plan ahead for "a reasonable financial return" on their purchase, one that is "comparable with other investments of similar risk." In plain English, you can figure houses will keep pace with inflation, if interest rates don't go through the roof.
* In financial terms, even after taxes, renting an apartment or house will make more sense for many Americans in the 1980s than it did in the 1970s. There won't be the "tremendous incentive to get in early" as a home buyer, or the feeling that "if I get in today I can make 100 percent on my investment in the first year," that characterized the late 1970s. Houses will lose their go-go sex appeal as investments, and become first and foremost houses again.
* Creative mortgage financing will take a well-deserved hard knock from the U.S. Supreme Court, but Congress and the thrift industry could work out a plan to soften the blow on home sellers and buyers. Pratt predicted the high court will rule in favor of the bank board, which contends that its regulations override all state laws regarding mortgage assumptions. (A case before the court involves California's prohibition against federal lenders automatically blocking assumptions of low-rate loans. A decision is expected sometime in the next two weeks.)
Significantly, Pratt said he would go along with a negotiated "national solution" to the emotional mortgage assumption issue "if it were productive for everybody." A solution quietly under discussion on Capitol Hill would provide discounted or "blended" rates for home sellers and buyers. Rather than pushing the rate to 16 or 17 percent on an 8 or 9 percent mortgage assumption, a lending institution would agree to some compromise rate--say 12 or 13 percent--for the buyer.
The assumed loan might jump to an adjusted market rate four or five years down the road. But in the meantime it would get buyers into houses they want, and squeeze better returns out of the money-losing mortgages on hundreds of S&Ls' books.