'Creative' plans: hope for home buyers

In the market to buy a home these days? Listen to Leonard J. Colwell, a realtor in Lexington, Mass.: "It takes a $50,000 income to buy into Lexington now, to buy a modest home -- not much more than an entry- level home. That's . . . a $90,000 house, putting

Across the United States, real estate experts estimate that 95 to 97 percent of all Americans have been priced out of the home-buying market.

The squeeze has sent both home buyers and sellers in search of new, creative ways to keep sales going. In many cases, the sellers put up the money for the loan. And at many banks and savings and loan associations, new types of mortgages are coming to the rescue of buyers.

Home buyers have been hit three ways this year:

* Soaring mortgage interest.

* Rising prices.

* Lack of mortgage money.

Mortgage interest rates nationwide have climbed into the 14 to 18 percent range. The median sales price of both new and existing homes has edged over $65 ,000. And in many areas, banks are running out of money for new mortgages.

Result: Average monthly payments to buy a home in the US have more than doubled in the past two years.

"I doubt anyone's income has shot up that much," says National Association of Realtors vice-president and economist Kenneth Kerin. Many homeowners now spend as much as 50 to 60 percent of their gross monthly income on house payments.

Thus the hunt is on for alternative ways, so-called "creative financing," to beat the high cost of borrowing money for home mortgages. A number of plans have sprung up with names like wrap-arounds, buy- downs, take-backs, graduated payments, and balloons.

Without these plans, the real estate market would be in even more serious trouble, say real estate professionals. "Eighty percent of all sales [of California homes] are done by the buyer assuming the seller's existing low-interest mortgage. Otherwise real estate [here] would be dead," says Gil Ferguson, director of Californians for Environment, Employment, Economy, and Development, an Orange County-based coalition that tracks the housing market in California.

Yet despite the growing trend toward alternative financing techniques, many real estate agents are warning buyers to shop for and research these plans carefully. Since the terms often are tailored for each sale, the buyers (and seller) need to seek legal advice to make certain they understand their rights and obligations.

Although real estate agents are labeling the current selling slump the worst since World War II, some home buying and selling, and even some building, goes on. Much of this action can be traced to the new crop of innovative financing techniques hastily devised by sellers, lending institutions, and builders. To a layman, the variations appear endless and bafflingly complex. Even those on the selling end are having trouble mastering the details and say it takes far longer to sell a home than it used to. Still, alternative financing is credited with paving the way to more than one-third of this year's home sale transactions.

For some potential home buyers turned back by today's economic conditions, the answer has not necessarily been rentals, which are also in short supply, but condominiums and rehabilitated housing. Increasingly, in city and suburbs, abandoned schools and lofts are being converted into condominiums. Some shoppers, particularly in warmer areas, are opting for mobile homes or "manufactured housing." Sales of such homes, now going for an average price of $ 18,500 (not including land, which is often leased), were up by 36 percent in april over a year ago.

In addition, many home buyers are trimming their estimates of space needs. Some are doubling up with another couple on a mortgage, sometimes sharing a duplex, or, if looking at a new house, shopping for a smaller house. Builders last year accordingly trimmed 50 square feet from the average new house constructed and are offering many new homes without garages or basements.

"Builders think the marketplace is changing," explains Robert Sheehan, director of economic research for the National Association of Home Builders, "and they want to adapt to it rather than be caught and blamed like the automobile industry was for not producing smaller cars sooner."

While prices are expected to rise more slowly in the year ahead -- 5 percent by some economists' estimates -- and mortgage rates are projected to decline by a point or two, the forecast from most real estate experts is basically for more of the same.

"I think there's a lot of pent-up demand out there," says Glenn H. Miller, vice-president and senior economist of the Federal Reserve Bank of Kansas City. "When we begin to get good news on low mortgage rates, we're probably going to get bad news on housing price hikes. . . . And I think we may have gotten as much mileage as we can out of the two-income purchaser and those other things which for years have kept housing affordable."

"The word 'grim' is not an overstatement of the present situation," says Lewis Bolan, vice-president of the Real Estate Research Corporation."And we don't see any sign of a letup. We think it's a fact of life that buyers are just going to have to adjust to."

Home buyers are also going to have to adjust to a rapidly arriving, radical new mortgage concept in which the rate of interest varies according to market rates during the life of the loan. The terms of this adjustable, flexible, or variable mortgage will be worked out between lender and borrower and are expected to take shape most frequently in a longer or shorter payback period rather than in a variation in monthly payments. Although it could save the home buyer some financing costs from having to renegotiate a mortgage if rates fall, many consumers are worried that they could be in for much more than they bargained for if rates should rise. While consumer acceptance will definitely affect the extent to which these mortgages are offered, shoppers may not have much choice. "They're going to look a lot better than no mortgages at all," says one banker.

For the moment, creative or innovative financing is bridging the gap between the fixed rate and the new variable mortgage.

The most common variation is to let the buyer (if the lending institution agrees) assume the seller's mortgage with its lower- than-market-rate of interest. Often the seller also will arrange to help on a second mortgage to meet the new sales price.

Sometimes a wrap-around mortgage is arranged in which the seller continues to pay the first mortgage and collects on a second loan made at a higher rate to the new buyer. Increasingly the rates of the two mortgages are blended. Last January Ameritrust in Cleveland, which had been making as many as 200 to 300 loans a month, found it was down to no more than five or six and that it was losing money on 16,000 older mortgages issued at low rates of interest. According to real estate officer Gary Eby, bank officials wrote to the homeowners involved, suggesting that, if they wanted to sell, the bank would offer a special lower- than-market-rate mortgage, blending the old loan with a new one covering the price differential.Mr. Eby says that more than 100 homeowners responded and that the bank did $6 million worth of additional mortgage business as a result.

"It was a situation where all of us benefited," he says.

The wrap-around mortgage is particularly popular with both Veterans Administration and Federal Housing Administration mortgages which are fully assumable by new home buyers. Both federally insured types of loans also make strong use of another common creative-financing instrument: the graduated-payment mortgage. Under it, payments start at less than they would with a fixed-rate mortgage and increase over time when, presumably, the buyer will be earning a higher income.

Another common aid for the financially strapped home buyer is the buy-down mortgage in which someone, such as the parents of the buyers, the seller of the house, or the builder, advances a cash sum or buys down a portion of the cost so that the buyer in effect gets a lower rate of interest on the balance of the purchase price. In addition to offering such buy-downs, builders also have tried renting new homes with an option to buy and leasing rather than selling the land underneath new homes to keep mortgage payments smaller. Also popular is a contract of sale usually involving a 10-to-15 percent down payment, monthly payments at a lower than prevailing rate as if it were a 30-year mortgage, and then full payment of the loan at the end of a few years.