Fannie Mae, the $400 billion golden lady of American mortgage finance, turned 50 this week. But don't look for any middle-aged sags, bags or slowdowns from the United States' biggest home lender.
To the contrary, David O. Maxwell, chairman of the Federal National Mortgage Association (Fannie Mae), said in an interview that lenders and borrowers should get ready for a whole new set of market-making breakthroughs.
For starters, don't be surprised if Fannie Mae comes out with a striking departure from its traditional loan-product line: some form of reverse mortgage that allows older homeowners to turn equity in their properties into hard, spendable cash, without having to sell the place, moving and or having to make monthly loan payments.
Maxwell emphasized that no decisions have been made and that an internal study of the seniors market won't be completed for several weeks. But he agreed it was now "inevitable" that Fannie Mae would plunge into the field, probably in two key ways.
Focus No. 1 would be on the homeowner living in a single-family home, with a declining income but little or noLenders and borrowers should get ready for a whole new set of market-making breakthroughs. mortgage debt. This is the classic "house-rich, cash-poor" situation. Fannie Mae's response, said Maxwell, could involve the reverse-mortgage concept, in which the borrower receives monthly checks from the lender. At some point, either on a specified date, at the time of sale of the property or after the death of the borrower, the accumulated debt must be repaid with interest from the sale proceeds.
Fannie Mae's entry into this product line would be significant. Fannie Mae's role in the mortgage market is that of a mega-investor. It buys loans by the bushel originated by local lenders, including fixed-rate, adjustable-rate, convertible, biweekly loans, and so on. By announcing its willingness to purchase reverse mortgages carrying specified rates and forms, it would open lenders' windows to an entire new product line, across the country. Savings institutions that currently have nothing for cash-strapped seniors except equity loans requiring monthly payments could add reverse mortgages to their menus, almost overnight.
As long as lenders could sell the reverse loans to the deepest-pocket investor of all -- Fannie Mae -- they'd be happy to make them in large quantities. That very phenomenon occurred in 1983-1985, when Fannie Mae plunged into the second-mortgage field for the first time. By agreeing to buy them, Fannie Mae transformed "seconds" from a high-interest-rate backwater into a relatively uniform, readily available form of finance. The rate differential between first mortgages and seconds, whichDon't be surprised if Fannie Mae comes out with a striking departure from its traditional loan-product line. had been three percentage points or more, dropped to one point or less.
Fannie Mae's second likely focus in the senior-housing arena would be on the rental side, Maxwell said. Thousands of older Americans every year sell or leave their longtime homes and seek specialized forms of retirement housing. Most of these projects are rental, and can be challenging for developers to finance. Fannie Mae could create a new secondary market for retirement-center mortgages, Maxwell said, and thereby help cut costs for developers and consumers across the board.
Still another major area of innovation for Fannie Mae will be overseas. The corporation already raises sizable amounts of capital in Europe and Japan, using bonds with names like Shogun and Samurai. But Fannie Mae's new frontier, Maxwell said, will be custom-tailored deals aimed at heavyweight private investors in South Korea, Singapore, Hong Kong and elsewhere.
Just last week, for example, the corporation announced a financing deal with Italian investors, with payments to them denominated in lira, not dollars. But why should American home buyers, brokers and builders care about such far-flung, exotic transactions? Because they are cutting the rate of interest domestic home buyers have to pay on new loans. By attracting foreign capital into American home mortgages, Fannie Mae is deepening the total capital base available to American home borrowers. The global market is cheaper -- albeit highly volatile at times -- than a market dependent solely on small, localized investors.
Some other thoughts from Fannie Mae at 50: Home buyers can look for a continuation of moderate interest rates for most of the year. "The politicians are doing their darndest to keep rates down" this election year, said Maxwell -- a portent of an active spring and summer for home sellers and their clients. Although the Reagan years have seen solid growth for housing generally, "housing for poor people has not kept pace." Ironically, Maxwell said, growing American sensitivity to the presence of the homeless on urban sidewalks "may be the spark that reignites the fundamental compassion of our people" -- and revives an aggressive federal role in subsidized housing in the early 1990s.
Maxwell said he is looking ahead to precisely that, with new financing programs in mind, whichever party wins the White House in November.