Two long-awaited pieces of legislation that could expand significantly the amount of mortgage money available to American consumers and cut the cost of home loans have been introduced on Capitol Hill.
Sponsored by the Senate's two top-ranking committee chairmen on banking and housing issues, the bills signal the start of a major congressional effort to widen the money pipeline between home buyers and Wall Street.
Here's what the proposals by Sens. Jake Garn (R-Utah) and John Tower (R-Tex.) would do, and how they could directly affect you as a buyer or seller:
Remove most of the obstacles that discourage pension funds, insurance companies and others from investing in ordinary home mortgages.
Encourage more private firms to go into head-to-head competition with the two government-chartered corporations that have dominated American home financing since the early 1970s, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac). Both corporations buy individual loans originated by local lenders in vast quantities. Fannie Mae, for instance, owns $70 billion worth of mortgages--roughly one of every 20 home loans in the country.
Encourage more diversity in the types of mortgages available in the marketplace. Large pools of home loans carrying innovative terms favorable to consumers--but not usually acceptable to large-scale investors--could be packaged and sold to Wall Street under the bills.
Cut the going rate of home mortgages for future buyers by increasing competition within the market and turning on more "money spigots," in the words of one supporter of the bills. Rates on home loans could be sliced by anywhere betweeen one-half and two percentage points, "simply by making mortgages as attractive and convenient as any other type of competing investment" available to an insurance company or other large owner of capital, he said.
The two new bills carry technical-sounding names that would make most consumers' eyes glaze over: the Trust for Investment in Mortgages Act of 1983 (S. 1822) and the Secondary Mortgage Market Enhancement Act of 1983 (S. 1821).
But stripped to their core, the proposals seek to make very basic, bread-and-butter changes in the business of financing homes. The technical amendments that the bills would apply to existing federal law will allow creation and sale of far greater numbers and varieties of what are known as "mortgage-backed securities." These are pools of hundreds of thousands of loans, packaged into bond-like securities that large capital investors can buy for income.
To picture how these work, imagine that the new mortgages made by banks on all the houses in your city or neighborhood this year were gathered together. The regular monthly payments coming in would make an attractive income--one not only secured by real estate, but carrying a higher return than money-market funds and corporate notes and bonds.
Now let's say those mortgage contracts were put into a package that provided payments on whatever schedule you as an investor wanted: once a year, twice a year, quarterly or monthly. Let's say also that all of the potentially sticky features of individual mortgages were guaranteed to be kept out of your hair: defaults, prepayments, foreclosures and the like.
You could buy into this pool of loans by purchasing a certificate--like a stock or bond--and be relatively certain you'd get the steady return you bargained for. You could buy the entire pool, for that matter, if you had enough bucks. Local lenders would make the mortgages, sell them into pools, and continue to service them indefinitely for a fee.
Although it comes as a surprise to some consumers, this is how more than half of all American home mortgages are financed today. The two new bills on Capitol Hill would speed the movement toward "wholesale" financing even faster. They would give the companies that put together wholesale packages additional powers to manage the cash flows on the loans in the pools. They also probably would stimulate creation of dozens of specialized competitors to Fannie Mae and Freddie Mac such as the new Residential Funding Corp. (RFC) of Minneapolis.
RFC--first previewed in this column last December--specializes in buying so-called "jumbo" home loans above $108,300 and 15-year mortgages. In its first seven months, RFC has committed to finance $1.5 billion worth of jumbo and other loans--mainly the types of mortgages that Fannie Mae and Freddie Mac can't or won't touch because of regulatory restrictions.
"The key here is "to open up the mortgage business to even more competition," said a staff aide on the Senate Banking Committee. "I mean, let's let a thousand flowers bloom. That will mean greater choices for more buyers--and who's going to beef about that?" Garn and Tower learn the answer to that question on Sept. 21, when they hold two days of hearings on their proposals.