A plan that could become this fall's hottest mortgage-financing tool for new home buyers--a no-down-payment loan carrying discount rates and no insurance fees whatsoever--should be available nationwide before the end of the month.
Known as a "reserve account" mortgage, the loan is designed for would-be buyers who lack down payment cash but who have adequate incomes to handle monthly payments at rates slightly below those in the regular marketplace.
The reserve-account plan is being introduced without fanfare by the largest housing lender in the country, the Federal National Mortgage Association, or Fannie Mae. It will be the first no-money-down, non-government-insured form of financing widely available to consumers in years.
Here's how it will work:
Under a special program Fannie Mae is making available to lending institutions this month, consumers will be able to qualify for loans up to $108,300. The mortgages will be restricted to purchasers of single-family homes who plan to occupy the property as their principal residence.
The loan will require no down payment from the buyer. But it will require the builder or seller of the house--or an outside party such as a relative, friend or even a realty broker--to put 5 percent of the purchase price into an interest-bearing, fully refundable savings account supervised by the lender originating the mortgage.
The 5 percent account will function as a form of temporary equity stake on the buyer's behalf: Should the property go into default and foreclosure, Fannie Mae would lay claim to it. The builder or other contributor of the funds will be able to obtain all of the reserve money back, plus interest, as early as three years after the sale.
Fannie Mae has set up a range of guidelines that determine the precise timing of the refund. For example, the earliest refund comes if the loan balance has dropped to 90 percent of the property's appraised value in three years.
That should be possible with a well-priced new home in a market with healthy appreciation in resale values.
A one-time fee of 2 1/2 percent of the initial loan amount also will be charged the builder or seller of the house as a "loss reserve," a form of self-insurance for Fannie Mae. The fee will not be refundable.
For the consumer, the plan will entail the following:
* No equity cash need go on the table at purchase, although normal closing or escrow costs will be borne by the buyer, seller or both, according to local custom or as the sale contract specifies.
* Interest charges on the loan will be pegged to Fannie Mae's three- and five-year adjustable-rate mortgages. Last week the loans with adjustments at three-year intervals were quoted at 12.4 percent, and those with five-year adjustable intervals were going for 12.9 percent.
* Initial rates on loans may be "bought down" even further than the quoted levels. For instance, a home builder who wants to advertise "No Money Down Mortgages Under 10 Percent!" can use Fannie Mae's regular "buy down" procedures to do so. These involve depositing funds with local lenders to subsidize purchasers' rates by three percentage points the first year, two percentage points the second, and one point the third.
* Unlike most cut-rate financing plans, reserve-account loans will not involve so-called "negative amortization" for the home buyers. Negative amortization means a buildup of additional debt for the consumer over the years, rather than a decrease. It is a common feature of graduated-payment loan programs that defer interest to later years.
* Unlike VA or FHA loans, buyers will pay no mortgage insurance fees because there is no direct mortgage insurance imposed on the individual buyers FHA, which offers no 100 percent financing in any event, now requires insurance-premium payments up front. This discourages some first-time buyers from using federal insurance.
The reserve-account concept -- though being approached cautiously by Fannie Mae -- could catch on rapidly this fall. It resembles the so-called "pledged account" plan used by builders in recent years. But the combination of cut-rate interest terms, no money down, and possibly lower monthly payments (via rate adjustments in future years) is unique.
On the potential negative side for the consummer, the reserve-account-loan idea could encourage some builders or individual sellers to pad their prices to cover the cost of the cash deposits required from them. However, because most builders already factor buy downs and other financing charges into the final selling prices of their units, this may be virtually unavoidable -- unless you bargain hard.
Where can you sign up for these no-money-down mortgages? Fannie Mae pumps money to consumers via thousands of lending institutions across the country, especially mortgage bankers. Some of these lenders will not have heard of the new program until you tell them about it (Bring a copy of this column and tell them to check it out at their regional Fannie Mae office.)
Other lenders won't be participating in the program at all, for one reason or another. Shop around during the next several weeks, and you should find a lender who's on the ball.