The new financial institutions reform bill passed by Congress contains a sleeper provision that could be worth thousands of dollars to you -- if you buy or sell a house with a loan that qualifies between now and July 1.
The sleeper concerns low-rate mortgage assumptions. It prohibits the Federal Home Loan Mortgage Corp. (Freddie Mac) from changing its rules for the next nine months on the estimated 700,000 home mortgages it has acquired in whole or part since the early 1970s.
It renders one of every 25 home loans in the country -- many of them carrying interest rates below 10 percent -- potentially assumable at their original rate until next summer.
Once July 1, 1983, rolls around, most of those mortgages and deeds of trust will revert back to non-assumable loans. Their Cinderella existence will end at the stroke of midnight June 30, turning them back into financial pumpkins.
The sleeper provision in the new law could be highly significant for you if two of the following three conditions fit your situation:
The mortgage on the house you own and live in was sold or "swapped" by your original lender to Freddie Mac or
The house you want to buy carries a mortgage that had been purchased in whole or in part by Freddie Mac and
The original local lender on the loan cooperates with you to permit assumption at the original rate, under Freddie Mac's existing rules, or at an attractive "blended" rate.
You may have already met one of the first two conditions and not know it. Literally tens of thousands of homeowners haven't the slightest idea that they live in Freddie Mac-financed homes.
Thousands of buyers (and realty brokers) routinely miss opportunities to take over eight- and nine-percent loans by not asking about the ownership of the mortgages on homes for sale.
Freddie Mac, one of the two major Washington-based, congressionally chartered investors in American home mortgages, buys loans in massive quantities from local lenders. It then resells "participation certificates" backed by pools of those loans to large institutional investors on Wall Street and elsewhere.
Local lenders who sell mortgages to Freddie Mac typically continue servicing the loans, collecting monthly payments, handling escrow accounts and the like. Homeowners usually detect no change, and no one at the local lender or Freddie Mac tells them what's happened.
Knowledge of the inclusion of a homeowner's loan in a Freddie Mac participation certificate, however, is potentially crucial information in the wake of the new financial-reform bill. That's because under Freddie Mac's existing guidelines, the loan is assumable at its original rate by credit-worthy purchasers while it's part of the certificate pool.
The local lender has the option to block the assumption by buying the loan back from Freddie. That costs money and customer goodwill, but some hard-nosed S&Ls do it anyway.
The local lender also has the option to buy the loan back from Freddie Mac to offer a larger, "blended-rate" loan to credit-worthy purchasers. That's a strategy with advantages for both lenders and new buyers. And it's likely to gain in popularity.
The ideal, however, is to be the buyer or seller before next July of a home carrying a single-digit, fixed-rate, long-term Freddie Mac loan, and to have a local lender who makes no waves.
The ability to offer a large, fully assumable, conventional mortgage at 8 1/2 percent could easily tack $10,000 onto the market value of a $90,000 home. That's $10,000 extra in the pocket of an alert seller. It could also spell the difference between being able to sell a house in 30 days and having it sit unsold for months. The Freddie Mac factor in the next nine months could be that important.
Here's how to find out whether you qualify. If you're the seller of a house and your name is on the existing mortgage, call your lender and ask whether the loan has been sold or traded to Freddie Mac. (The odds are better that it has been if your lender is a savings and loan or savings bank than if it's another type of institution.)
Every lender is required to disclose to borrowers whether their mortgage has been sold to Freddie Mac, according to Freddie Mac officials. Lenders don't have to reveal such information over the phone to realty agents, so it's better for the actual mortgagor to do the inquiring.
If a lender refuses to cooperate or provides erroneous information, the situation should be brought to the attention of the Freddie Mac regional office in Arlington.
Whatever you do, don't wait for your local lender to call about this fleeting, nine-month opportunity. Along with Freddie Mac, your banker would probably prefer that you didn't know about it.