‘2-Step’ Loan May Ease Home Buying
Hundreds of thousands of consumers nationwide may find home ownership more attractive and affordable thanks to a new mortgage being launched today.
The so-called “two-step” mortgage--a hybrid fixed-rate loan that is expected to offer a slightly cheaper initial rate than other fixed-rate mortgages--was particularly designed for first-time home buyers who have found it increasingly difficult to attain the American dream. It could save the buyer of the median-priced home in California at least $4,000 over a seven-year period.
Additionally, at least 110,000 families nationwide that cannot now qualify for a home because of the combination of high interest rates and high home prices would be able to afford the median-priced home by using this new loan, said John H. Fulford, senior vice president of the Western regional office of the Federal National Mortgage Assn., a federally chartered corporation--better known as Fannie Mae--that is making the loan available through participating savings and loans, mortgage bankers and other lenders.
“It doesn’t seem like such a big deal until you realize that 110,000 more families would be able to buy homes,” Fulford said. “Housing affordability is a national issue.”
It is a particular problem in California, where housing prices have escalated so fast that now only about 19% of the state’s residents can afford to buy a home, said Pete Mills, manager of research and policy analysis with the California Assn. of Realtors.
And the statistics are worse in urban areas. Only 16% of Los Angeles households can afford the median-priced home, while only 14% can afford it in Orange County and 11% in San Francisco.
Nationwide, 48% of the population could qualify to buy the median-priced home, which cost about $93,000 in 1989.
The cost of the median-priced home in California is $196,521. In Los Angeles, the median price is $215,472; in San Francisco, $260,592; in Orange County, $245,262.
Only about 10 lenders have signed up to offer the two-step program so far, but they include big California mortgage lenders such as California Federal Bank, Glendale Federal and Countrywide Funding. However, Fannie Mae, which buys billions of dollars of lender-generated loans and resells them to investors, expects many more lenders to sign up soon, Fulford said. Fannie Mae’s willingness to buy certain types of loans usually means that hundreds of lenders will be willing to offer them, because they can in turn sell the loans to Fannie Mae but still keep loan fees.
The maximum loan offered under the program will be $186,450--the limit on so-called “conforming” loans bought by Fannie Mae, which will make it difficult for many Californians who pay significantly more than that for their homes to use the program, Fulford acknowledged.
But Security Pacific National Bank, which is considering offering the two-step mortgage loan, expects similar products to be created for larger loans if the two-step is successful.
“If it is successful, it would more than likely be expanded quickly because it would then be a tested product,” said Scott McAfee, managing director of Security Pacific’s residential real estate group.
However, the two-step mortgage is anything but a revolutionary product. It is, in fact, a slight variation of an ongoing mortgage program called the “30-due-in-seven.” This loan is a 30-year fixed-rate mortgage that requires a lump-sum “balloon” payment after seven years.
Lenders offer the 30-due-in-seven loan at a slightly lower rate up front, because they are not taking the risk of keeping it on their books at that old, fixed rate for more than seven years.
The concept is the same with the two-step, but instead of having a balloon payment, the loan will just reset at a new rate after seven years. The new rate will be based on the going rate for 10-year treasury bills whenever the seven-year period is up.
Although no one can predict now what that rate will be, Fannie Mae said it cannot be more than 6 percentage points higher than the initial rate.
Meanwhile, borrowers using the two-step loan will get a lower initial fixed rate. Lenders that have already agreed to offer the two-step mortgage said it will carry an initial fixed rate between 0.375 and 0.5 percentage points lower than conventional 30-year fixed mortgages.
For example, Countrywide Funding, a Pasadena-based mortgage banking firm, said its two-step loan will be offered today at between 10% and 10.125%, compared to its regular fixed mortgage, which now carries a 10.5% rate.
The difference may not seem significant in percentage terms, but over the life of a loan, it amounts to a substantial sum of money, Mills said. On the median-priced California home, for example, the home buyer would save about $4,100 over a seven-year period.
Borrowers could save the same amount by getting a 30-due-in-seven loan, but then they would have to pay refinancing costs at the end of seven years--assuming they stayed in the same home. That could amount to about $5,000, Mills said.
