The Federal Home Loan Mortgage Corp., in a move that could make second mortgages cheaper and easier to obtain, announced Tuesday that next week it will begin to buy second mortgages from lending institutions.
The action by Freddie Mac, as the corporation is widely known, could help stabilize the turbulent home-equity loan market, but it could also expand the nation’s already soaring consumer debt.
Michael F. Coffey, an acting vice president of the agency, declared that the new program “will help unlock billions of dollars in housing equity for homeowners and provide new investment opportunities for mortgage lenders.” He noted that only about $150 billion of the nation’s estimated $2 trillion in net home equity has been tapped for second mortgages.
Coffey speculated that Freddie Mac’s entry into the field might push down prevailing interest rates on second mortgages by as much as three-tenths of a percentage point. He said an expanding market for second mortgages would give first-time homeowners in the baby boom generation a chance to raise cash for home improvements, college tuition, investments, medical expenses, debt consolidation or purchases of a second homes.
Coffey said the corporation would offer lending institutions an interest rate equal to the prevailing market rate for conventional 30-year first mortgages--currently 10.5% nationwide--for second mortgages. He said Freddie Mac would require that the second mortgage as written by the lending institution bear an interest rate at least half a percentage point higher than the first mortgage on the property.
He stressed that Freddie Mac will buy second mortgages held only by homeowners deemed able to repay and that it will buy only second mortgages with fixed interest rates and 5- to 15-year maturities. The corporation, he said, will shun the variable-rate loans some institutions are currently writing against housing equity.
Borrowing Binge Feared
An expanding market in home-equity loans--$75 billion in 1985 alone, according to Freddie Mac--has sparked concern among some economists that the nation is on a borrowing binge.
Coffey conceded that Freddie Mac, a publicly chartered, nationwide home-mortgage pooling institution that is owned by savings institutions supervised by the Federal Home Loan Bank Board, is entering the second-mortgage market precisely because that market has expanded so rapidly in recent years.
Its privately owned sister organization, the Federal National Mortgage Assn. (commonly called Fannie Mae), entered the second-mortgage market three years ago and now holds $3 billion in its second-mortgage portfolio. Coffey said he expects Freddie Mac to buy about $1 billion worth this year.
But some specialists in the nation’s mortgage market said they doubted that Freddie Mac’s entry into the second mortgage field would have more than a marginal impact on aggregate private borrowing. James Christian, chief economist for the Chicago-based U.S. League of Savings Institutions, expressed concern about the growing level of indebtedness in the nation, but he said he doubts that Freddie Mac’s action will have much impact.
“Our surveys indicate that people guard their home equity jealously, so I doubt the market will expand that much,” Christian said.
Higher Loan Quality
“The market in general is trying to establish higher loan quality,” Christian said, “and if you have your first mortgage balance down to $40,000 or so, who cares if you take out another $20,000 or so?”
Peter Knight, vice president for mortgage finance with the National Council of Savings Assns. in Washington, also discounted the impact of the move.
“The dramatic effect was when Fannie Mae moved into second mortgages three years ago,” he said. Before Fannie Mae’s entry, he said, second mortgages carried interest rates 2 to 5 percentage points greater than first mortgages, and Fannie Mae offered to buy second mortgages for the prevailing rate for first mortgages--the same approach to be followed by Freddie Mac.
Sam Lyons, senior vice president in charge of mortgage banking at the Beverly Hills-based Great Western Savings & Loan Assn., said that Freddie Mac’s entry adds “depth and credibility” to the market in second mortgages. Great Western, the nation’s third-largest S&L;, writes about $25 million a month in second mortgages.
Lyons noted, however, that the demand for second mortgages--or second trust deeds, as they are called in California--is shrinking just as Freddie Mac is getting into the business. Homeowners are refinancing their first mortgages at current lower rates rather than using second mortgages to borrow against the equity that they have acquired in their homes, he said.
Ceiling on Loans
Under Freddie Mac’s new rules, which closely parallel those applied by Fannie Mae, the corporation will buy second mortgages up to a ceiling of $66,625 per loan. It will allow total debt--the second mortgage plus the unpaid balance of the first mortgage--to reach no higher than 80% of home market value for homes valued at less than $150,000 and 70% for more expensive homes. Second homes and investment properties would not be eligible for Freddie Mac second mortgages.
“I don’t think this will spark a binge of abusive borrowing,” said Warren Lasko, executive vice president of the Mortgage Bankers Assn. of America. “Rather, this is a welcome move because there are a number of lenders in the home equity market that are less than scrupulous, and Freddie Mac, with a reputation for being cautious in underwriting, is highly sensitized to abuses in that market. This should bring added discipline to the market.”
Staff Writer John Broder in Los Angeles contributed to this story.