There's a revolutionary old type of mortgage that's suddenly looking better and better to home buyers and property owners nationwide who need to refinance. Hold on to your hat: The real-estate rages of the moment are FHA and VA.
You read it right. FHA and VA -- traditionally the least creative, standard-issue loans you can get -- are taking off. They may even make sense for you.
Consider the facts:
The only fixed-rate, low-down-payment, long-term, fully assumable loans around at 13 1/2 percent are FHA and VA.
* Many FHA-VA loans offered by mortgage bankers -- for refinancing of existing homes, resales and new-home purchases -- now actually carry rates of 11 1/2 to 12 1/2 percent. For example, one national mortgage banker with offices in 18 states has taken in $75 million in applications in the past 20 days alone for 11 percent FHA mortgages that are fully assumable for 15 years.
* FHA and VA loans carry no prepayment penalties. If mortgage rates drop even further during the next year or two, borrowers can refinance with less financial pain than they could with most conventional loans.
The sheer lack of "creativity" about standard FHA and VA loans seems to have a growing appeal for borrowers. The fact that payments are cast in concrete for up to 30 years attracts people who've been biting their nails worrying about balloon payments, adjustable-rate indexes, defaults and foreclosures.
Even if buyers (or owners refinancing) have to pay significant sums of money up front in the form of "points" to get a below-market-rate FHA or VA loan, they're suddenly willing to do it, according to mortgage-finance executives. (One point is equal to one percent of the mortgage amount.)
"There's been a fantastic change in public perception out there, no question about it," says James Williamson, vice president of the Pittsburgh-based building firm Ryan Homes.
"We're doing 50 percent of our business on FHA-VA this fall," Williamson says, and adds that the percentage is headed up.
Faced with the often confusing and worrisome alternatives in the financial marketplace, many buyers "are voting for the old, conservative approach" of the 1950s and 1960s: a government-backed, fixed-payment loan with a low rate and long-term guaranteed assumability, he adds.
Banco Mortgage Corp., the third-largest mortgage firm in the country, is selling its 11 percent, 15-year FHA and VA loans to homeowners, buyers and builders "like hotcakes," according to W. Owen Carlson, senior vice president. "People are ringing the phones off the hook" to get a shot at what some of them believe will be a short-term opportunity to lock in low rates, says Carlson.
The Banco plan works like this: The consumer can put down as little as 5 percent and qualify for a fixed-rate, assumable mortgage of up to $89,500, carrying an 11 percent rate.
Banco requires a stiff sum up front for this loan: nine pointsfrom the seller of a home and one point from the buyer. Home builders typically include their share of the points in the price of the homes they're marketing. Individuals reselling houses either tack them onto the price or absorb them in whole or part as a price discount.
A homeowner refinancing an existing home loan would have to pay all the points.
Despite the hefty points, large numbers of consumers are using the cut-rate FHA and VA plan to pay off first and second balloon loans coming due on their properties or to get out of existing mortgages carrying rates of 15 percent and above, according to Carlson.
The owners of a town house with a $50,000, 16 1/2 percent loan, for instance, would cut their monthly payments from nearly $700 to $625 by refinancing into an 11 percent, 15-year FHA mortgage -- despite having to raise their debt to $55,000 to handle the points.
More importantly, though, they'd now have financing that could help to sell their house later, instead of a 16 1/2 albatross that nobody would want.
Banco's 15-year, cut-rate concept is being tried by other firms active in major markets in most states. If it catches on and if rates edge down even further in the coming weeks -- say, an FHA rate of 13 percent or slightly below -- the rate on some of the plans could be cut to 10 1/2 percent.
Buyers of new and used homes could get what no one's seen in the real estate market for years: fully assumable, insured, fixed-payment mortgages under 11 percent, with no balloons, bullets or other sticky wickets.
The irony of it all, of course, will be that the deliverer of these goods will be two federal government housing agencies operating under a president who'd prefer to phase them out of competition with conventional private lenders.