Buying a home the old-fashioned way -- with a fixed interest rate mortgage on a set term basis, usually 25 to 30 years -- is no longer feasible in today's unsettled market, say banking, real estate, and mortgage loan experts.
And the traditional mortgage banker -- the savings-and-loan banks and thrift banks -- is dropping the old way or in many instances getting out of the home loan business. New mortgage brokers are entering the arena -- commercial banks, insurance companies, union and private pension funds, mortgage loan firms, and state and federal agencies.
Loan brokers are also promoting a variety of mortgages, variable rates, shared appreciation, shared equity, and others. They claim that fixed-rate mortgages are not the way to do business in the current economic climate.
Not so, declares Henry Parker, state treasurer of Connecticut. He promotes Yankee Mac, which utilizes a comparatively untapped source of mortgage money -- two state pension funds, those of teachers and state workers -- to make owner-occupied housing (1 to 4 units) available to the "average family."
Kicked off on June 3 with a $40 million pool of pension money, Yankee Mac is already "a tremendous success," Mr. Parker boasts. With 714 loans approved already, he said, "We have surpassed 70 percent of our goal of 1,000 buyers in the first year." Yankee Mac has a waiting list seeking $12 million in loans.
Connecticut's program is defying today's trends in an unpredictable market, specialists say.
The mortgage market is moving toward a permanent change in financing, says Peter S. Damon, president of the Massachusetts Mortgage Bankers Association. Three months ago he called the market "terribly disorganized," adding that "10 telephone calls will introduce you to 10 varieties of new instruments" for making loans.
Mr. Damon, senior vice-president of the Charlestown Savings Bank of Boston -- a thrift bank that has halted direct mortgage loans, but does purchase loans on the second market -- says the fixed-rate mortgage is "virtually passe," adding that a positive result is the coming of reliable new methods.
As the market settles into "a semblance of order," Damon says, home buyers can get definite quotations on mortgages. "The fundamental change," he said, "is that basically the future borrower will share the risks with the lender on the ups and downs of the market."
Customers are not demanding fixed rates, although this approach is consumer oriented, other real estate brokers say. "All kinds of exotic new instruments are being reported in the media," said Richard B. DeWolfe of DeWolfe Company, Realtors, noting that these methods are not always familiar to many bankers and brokers.
Fixed rates were surviving, however, because the secondary mortgage market -- quasi-federal agencies, Federal National Mortgage Association (Fannie Mae), Government National Mortgage Association (Ginnie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac), that buy federally insured (FHA and VA) mortgages -- bought only rate mortgages. In August these agencies changed their rules to permit the purchase of other types of mortgages.
Another basic problem facing home buyers is a growing withdrawal of savings banks and thrift institutions from the mortgages lending market. At present only the large commercial and savings banks are able to issue market rate loans at currently high interest rates, says John Heerwagon of the Massachusetts State Banking Commission.
The new "All Savers" certificates, effective Oct. 1, will provide an additional source of mortgage money at thrift banks, he says.
In Massachusetts 30 percent (21) of the state's 66 savings banks no longer offered mortgage loans, Banking Commissioner Gerald T. Mulligan said in his June 1 report. The report also noted that 18 savings banks offered nonfixed-rate mortgages, and 29, only 40 percent, offer fixed-rate conventional mortgages, 20 percent down payment and 25 to 30 years to pay.
Although Yankee Mac is an instant success in the use of state pension funds, other states, including Massachusetts, have tiptoed into the mortgage market with retirement funds. But their efforts have been too timid, too cluttered with restrictions, too shackled with red tape, says Mr. Parker, Connecticut's treasurer. The result -- minimum impact, he concludes.
Massachusetts set up its pension venture in 1980, a year ahead of Connecticut , with a $19 million pool, but legal technicalities -- the tax status of invested pension funds -- have limited its progress. The state investment committee has proposed "corrective legislation" to put the pool to work, says Joseph Flatley, administrator for policy development in the state Executive Office of Communities and Development.
The Bay State has formed a Task Force on Homeownership Financing with the goal of making home ownership available to more people. Mr. Flatley notes the Massachusetts problem -- in 1973 more than 72 percent of the state's families could afford the average home, but in 1980 only 11 percent could afford housing at market prices. This has become a nationwide trend as the national median price of new homes has soared to nearly $100,000.
Through Yankee Mac, the Connecticut pension fund program, divided equally among the state's six congressional districts, appears to be working because it offers home buyers a 13.75 percent interest rate, and the average house is costling only $55,000, "lower than we expected," Parker says.
"We have developed a program that will put $450 million in pension funds into the housing market in our state within five years," said Joseph Barraco, investment officer with the state pension funds.
This pool offers half its fund to the general public. The other half is set aside for state pensioners 60 days before it is open to the general public.
Two banks are backing the program. The Connecticut Bank & Trust Company of Hartford is trustee. People's Savings Bank of Bridgeport, New England's largest home mortgage investor, is the "master servicer" of Yankee Mac. It monitors the location of all mortgaged properties, ensuring that loans are divided equally among the state's six congressional districts. People's Savings is also the clearinghouse for all participating banks.
Defining Yankee Mac as a "hybrid security that has characteristics of a long term, AA industrial bond" combined with some "traditional mortgage debt securities," Mr. Barraco says the program eases restrictions that hamper Massachusetts and other state and federal long-term mortgage programs.
Yankee Mac permits spending up to 33 percent of gross income for mortgages, compared with the federal 25 percent; "this opens purchases to families with $22 ,500 income or less" -- allows no more than two points [2 percent] to cover one-time handling fees by participating banks, and limits total debts up to 38 percent of gross income, compared with a general 27.3 percent limit, says Mr. Barraco.
An innovative home mortgage experiment in its embryo stage is the California Homeownership Assistance Program (CHAP). The state co-invests up to 49 percent of the purchase price with an "eligible household," reducing down payments to as slow as 3 percent and working out a joint loan and first mortgage with an "approved mortgage lender." CHAP officials are working with state and federal agencies on details of a permanent program beyond the trial period.