Closing the Sale : Merrill Lynch Offers Unusual ‘No Money Down’ Mortgage

Eager to spur home sales, Merrill Lynch Credit Corp. said Thursday that it will offer California home buyers an unusual “no money down� mortgage.

In offering the program, which will soon be extended to several East Coast states, Merrill Lynch is taking the lead among traditional home lenders and real estate finance companies that have begun offering a variety of adjustable-rate loans, cash rebates and other incentives to prevent rising interest rates from choking off a nascent housing recovery.

Lenders are also seeking new business now that the home refinancing boom is peaking.

Although some lenders in the past have marketed “no money down� mortgages, the Merrill Lynch mortgage is a departure from past practices in that it allows customers seeking home loans to bring in a sponsor to pledge assets in lieu of the usual required 5% to 20% cash down payment. The sponsor could be the borrower’s parents or another qualified patron who would pledge investment securities or the equity in their own homes.

While no upfront cash is required, sponsors would be liable for the amount of the down payment in the event the buyer defaults on the loan. What’s more, Merrill Lynch’s underwriting standards are somewhat stricter than other lenders since the firm requires a minimum 30% down payment.

Nevertheless, an additional 1.6 million California residents would be able to afford a home under the no-money-down loan program, Charles A. Humm, Merrill Lynch’s senior vice president of marketing, estimated.

A sponsor guaranteeing a buyer’s down payment would have to pledge securities worth 130% of the down payment or home equity worth 110% in their Merrill Lynch account. And there is a one-time $300 account fee and a 2% service fee on the pledged assets. Humm estimated that monthly mortgage payments on a $200,000 home purchase would be about $300 higher than normal under the program.

Low interest rates in recent months lured many home buyers into the market, but a recent uptick in rates has many in the housing industry concerned about another slowdown in home purchases.

“Every little bit interest rates go up hurts,� said Martin Regalia, chief economist at the National Council of Community Bankers in Washington, D.C.

Real estate agent Weesie Daniel said home sales at her Prudential California office in Palos Verdes Estates have dropped 50% since January as a result of rising interest rates. “One full percentage point makes a difference in people’s outlook,� Daniel said.

To attract home buyers concerned about rising rates, Pasadena-based Countrywide Credit Industries Inc. said it will begin offering four new kinds of low-interest loans next Wednesday, including a 30-year loan whose rate is fixed for the first five years and then converts to an adjustable. Bank of America earlier this week unveiled an adjustable-rate loan for purchases of newly constructed California homes that has a 6% initial interest rate that is fixed for 36 months.

Most adjustable mortgages now carry initial rates that are only guaranteed for a year.

Meanwhile, New West Financial Services of Ventura is offering cash rebates to home buyers or sellers who use its toll-free real estate broker referral service. Under the program, 15% of the commission of a participating real estate agent is rebated to consumers. Haven Burke, president of New West, said participants can freely negotiate the agent’s real estate commission before the sale but that a rebate on a $200,000 home sale would be about $900.

Mortgage Rates Edge Higher

Experts fear a nascent housing recovery may be choked off as mortgage rates creep upwards.

Average national mortgage rates:

March 20, 1992: 9.12%

One-year adjustable mortgages:

March 20, 1992: 6.23%

Source: HSH Associates