Movable mortgage makes sense
Tom Kelly
Inman News™
There used to be a big push by lenders to secure "customers for life." Not only did banks promote attractive mortgage programs, but they also targeted the same customers for checking and savings accounts, individual retirement accounts, credit cards, auto loans, wealth management advice and insurance services.
Now, with many borrowers upset with their present lender about home loan refinance problems, the warm-fuzzy, customer-for-life feeling has given way to a can't-wait-to-escape attitude. Individual services seem to have their own promotions.
One of the more intriguing offerings used to lure more than mortgage borrowers came from E-Trade Mortgage, a subsidiary of E-Trade Financial.
It sought to add stock and bond investors and other financial services clients by rolling out a Mortgage on the Move Loan (MOTM) product that gave customers the option of taking their new loan with them -- including a low-interest rate -- to their next house. The program is no longer available because E-Trade no longer originates and keeps its own loans.
"The loan was great for baby boomers, especially those with retirement just on the horizon," said Robert Bernabe, E-Trade's former vice president of retail mortgage lending who created the program. "They could use the loan to buy a truly nice home now, then carry that interest rate with them when they were ready to move to another home for retirement."
Many mortgage professionals would like to see more similar programs today -- loans that demand borrowers to have "skin in the game" (sizable down payment) in exchange for a benefit down the road (movable mortgage). That way, consumers save thousands of dollars in loan fees and interest payments that come with "restarting the mortgage clock" every time they are lured to refinance.
Traditional mortgages require homeowners to apply for new loans with every new home purchase. There are fresh credit checks to complete, income statements to verify ... not to mention rates and fees to negotiate. The MOTM option removed much of that hassle, plus introduced the possibility of eliminating possible higher payments brought by a higher interest rate.
While the MOTM loan did allow customers to lock in today's rate in tomorrow's environment, it came with specific limitations. First and foremost, the MOTM option was only available on new purchase loans, not refinances. The option could be exercised one time only on an owner-occupied, single-family residence. No second homes or vacation homes qualified, and any condominiums had to be in a building with fewer than four stories.
"Most of the inquiries came from people who wanted to refinance," said Bernabe, who advises a pay-it-off philosophy in his 2010 book, "Mind Your Own Mortgage." "We did not sell the loans and did not have enough resources to handle all of the refinance business. I wish we had -- it would have helped a lot more people."
Financing guidelines were fairly stringent -- all MOTM options were for 30-year, fixed-rate loans and no stated-income or low- or no-documentation loans were permitted. Borrowers had to show timely payments for the past 12 months and any bankruptcies must have been discharged for at least 48 months. No foreclosures were permitted on the loan application. Loan amounts ranged from $60,000 to $1 million.
The MOTM option was appealing to borrowers seeking to lock in predictable, reliable long-term housing costs -- especially to first-time buyers who preferred 30-year, fixed-rate loans. It made sense to consumers who knew they would be facing a job relocation in the near future.
"Today's lenders need to do a better job of getting people into homes -- and keeping people in homes -- who deserve to be there," Bernabe said. "Now, a self-employed individual with equity in his home can't afford to refinance but somebody with little or no money down can get a loan. It just doesn't make sense, especially with interest rates at 50-year lows."
There are lenders who do/did not sell their loans to Fannie Mae and Freddie Mac, preferring instead to hold them on their books, or in their own "portfolio." Seattle-based Washington Federal, a portfolio lender in seven states, has offered rates a slight tick higher than its competitors in exchange for an inexpensive, one-time refinance.
"We need to get out of this economic mess by reducing our consumer debt," said Bernabe. "Consumers need to take the best mortgage for them, not just the best rate offered by the lender. There's too much restarting of the mortgage clock."
Tom Kelly's book "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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