City Bank

Cheap mortgages in Chicago

Psst. Want a mortgage for under 8%? Try moving to Chicago.

Interest rates on most home loans have long hovered around 9 1/2% or 10% or more, but last week more than 2,000 families in Chicago were able to get financing at a bargain 7.99%. The funds involved, totaling $83 million, were raised through tax-free municipal bonds in an intriguing experiment in encouraging urban homeowning.

The cut-rate mortgages were devised by the E.F. Hutton brokerage firm, working closely with city hall. Alarmed by the continuing exodus of Chicagoans to the suburbs--the city has lost about 50,000 middle-class citizens a year since the mid-1950s--Mayor Michael Bilandic warmly embraced the plan as a way to subsidize home loans without increasing taxes.

The city issued $100 million worth of long-term bonds paying 6.99% tax-free interest, which were marketed through a Hutton-organized underwriters' syndicate. The bonds sold out in a day; the underwriters split a $3 million fee, and a Chicago savings and loan association got the job of lending out most of the proceeds as mortgage money. The rest, $14 million, was set aside in a special fund to cover any defaults; the income from this money, which is to be invested in high-yield (8.5%) Government securities, will cover the underwriters' fee and other costs. Unlike federal home-loan subsidies, which now are usually targeted for lower-income home buyers, these mortgages are available to applicants with incomes up to $40,000--the middle-class taxpayers that the city is most anxious to keep.

On the purchase of a $60,000 house, residents would save $85 a month compared with the cost of a conventional mortgage. Engineer John Passarello, 24, and his wife, a secretary, saved for a year to get a down payment for a $45,000, two-bedroom house on the city's South Side, but were unable to find regular financing under 10.1%. The city-backed loan, Passarello says, "will make the difference between having to scrimp and being able to enjoy our new home."

Some Chicagoans criticized the program, arguing that the city has been losing its middle class mainly because of crime and poor schools, not high housing costs. Bankers also fret about possible disruptive effects on the regular mortgage market. Still, the experiment has appeal in an age of spreading downtown decay and rising taxpayer unrest. Two Colorado cities, Denver and Pueblo, plan similar programs to start in a few weeks.

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