Fed seeking safety in seller mortgages
Just as water flows from mountaintops to valleys, home buyers run from high-interest mortgages to low-interest ones. More and more home buyers are passing up conventional mortgages, which charge 18 or 19 percent interest, to mortgages charging only 11 or 12 percent and are partly or wholly financed by the seller.
Seller-financed mortgages include nontraditional ''balloon'' financing and ''interest only'' second mortgages. In these arrangements, the buyer makes low interest payments for a few years, but at the end of that time is required to pay the entire amount due on the mortgage and must either refinance the loan or face foreclosure.
In a move to ensure that more buyers become aware of the risks involved in such mortgages, the Federal Reserve Board recently proposed revisions to its Truth in Lending Simplification and Reform Act.
Truth in Lending requires mainly bank lenders to provide customers with disclosures of the mortgage before a purchase and sales agreement has been signed. The disclosure itemizes all costs, tallies them up, and lays out a payment schedule.
The board's proposal widens the definition of a credit arranger to mean a person who regularly develops or negotiates credit terms and assists in completing credit documents, such as the contract of sale.
This means that real estate brokers, often more interested in making a sale than in informing clients of payment details, would have to supply disclosure statements to the buyers. If the statement contained incorrect information, the broker would be subject to civil penalties of up to $1,000.
The cost of the disclosure paper work and the increased risk of fines for mistakes would make the economic burden on the brokers a little heavier, the board agrees. But the buyer is so much the wiser.