Almost $100 million has been committed to lenders in Washington, Maryland and Virginia over the next 12 months in a special program designed to promote a new adjustable-rate home mortgage to borrowers who have been generally resistant to variable-rate loans.
Under the program, a joint effort of the Federal Home Loan Mortgage Corp. (Freddie Mac) and Ticor Investment Securities Co., home buyers will be offered a new "convertible adjustable-rate mortgage" that can be converted to a fixed-rate loan after the first three or five years of the loan.
If that option is taken, the adjustable-rate mortgage is converted to a fully amortized fixed-rate loan for the balance of a 30-year term. The fixed rate would be based on the market rate for 30-year fixed-rate mortgages at the time of the conversion.
Overall, a total of $1.42 billion is being made available nationwide for the program, "the largest single commitment ever made" to provide market-rate funds for housing through the secondary market, according to Kenneth J. Thygerson, Freddie Mac's president and chief executive officer.
Thygerson told a news conference last week that he hoped the new instrument would appeal to reluctant borrowers who have shied away generally from adjustable-rate mortgages, which he said many lenders prefer to have in their portfolios.
"The 'convertible adjustable-rate mortgage' gives borrowers a chance to try an adjustable-rate mortgage at a lower cost than a fixed-rate loan and yet have the security that a fixed-rate option is still available if their individual financial picture changes within the first three or five years of their mortgage," he said.
Ticor took the initiative in designing the new type of mortgage and used its nationwide marketing network to line up 181 lenders, including commercial banks, savings and loan institutions and mortgage bankers, in 38 states to participate in the program. Ticor had received a prior commitment from Freddie Mac to purchase the mortgages made by the lenders Ticor lined up to participate in the program.
Freddie Mac said $10 million is committed for loans in Washington; $72 million for loans in Maryland, and $14.5 million is committed in Virginia.
If the average loan Freddie Mac buys under the program is $50,000 and if lenders use all $1.42 billion committed, Thygerson said the program will help finance almost 30,000 homes. Mortgages of up to $108,300 are allowed. Although a major portion of the commitment is expected to finance new homes, he said funds also will be available to finance the sale of existing homes.
Besides the convertible adjustable-rate mortgages, however, lenders can use their special commitments to sell to Freddie Mac any conventional loan it would purchase under its standard programs for home loans. Chartered by Congress, Freddie Mac buys mortgage loans from eligible lenders and sells mortgage securities to investors.
C. William Griffin, executive vice president of Ticor Mortgage Insurance Co., a large private mortgage guaranty insurance firm and a subsidiary of Ticor Investment Securities, said that a significant percentage of the lenders who signed up are smaller lenders who might not otherwise have access to such an attractive source of mortgage money.
The program also has a special feature that serves as an incentive to builders, allowing builders to buy down the interest rate of a home buyer's mortgage during the first two or three years, Griffin said. One plan allows a builder to buy down the note rate by five percentage points in the first year, three points in the second and one in the third. The other option allows a builder to buy down the mortgage rate by four percentage points in the first year and two points in the second.
The buy-down provisions allow purchasers to qualify for homes that might be out of their reach under normal financing. "Builders have responded very favorably to these plans because they enable homebuyers to qualify at rates which are substantially below market," Griffin said.
He noted that the program helps develop a new market of opportunity for Ticor's customers and their home-buying customers. In addition, Ticor collects a fee from Freddie Mac by acting as a conduit, and also hopes to get a fair amount of mortgage insurance business from the program as well, he added.
Freddie Mac officials said they would be exploring a variety of ways to finance the mortgages under the program. If the volume is sufficient, Freddie Mac might issue mortgage-backed securities, they said. Another option would be to broker the mortgages back to lenders who might find them attractive for their portfolios.