Just Call Him ‘Sam’ - The New Kid On The Loan Block
Stimulating new originations will require some innovative product thinking.
One key goal is to identify programs with lenders.
By Madeline Johnson-Oler, CMB
Like last summer’s successful television program, many mortgage bankers
in the new century are trying to “survive” the desert island
of shrinking originations.
These are interesting times in the mortgage industry. While refis are
few and far between, interest rates are still very affordable for most
homebuyers. So, what is needed to stimulate more origination volume? Many
successful mortgage bankers say it is finding the “niche” that
will set you apart from all of your competitors.
Niche products have brought name-brand recognition to many mortgage lenders
who championed products such as:
- reverse mortgages,
- 203k loans, and
- no income/no asset loans.
This dream has come true a few times in the past, but not that often. Therefore, we must focus on establishing real-life production scenarios.
Many mortgage bankers have found that the Internet is not the panacea for all their problems. Last year, Internet originations accounted for only 1% of closed loan transactions. Although automation is the key to increasing efficiency and profitability, the consumer is not yet ready to commit to big-ticket items with just a click of the mouse.
So, what can we offer the consumer that sets us apart from the rest? The answer lies in providing a product to the consumer from which they can immediately benefit.
Unique twists
Two such products that have recently been introduced are the Pro Mortgage and the SAM (Shared Appreciation Mortgage). Both offer unique twists that allow future homeowners to purchase more “house” for their qualifying income level.
The Pro Mortgage, offered by National Commerce Bank Services Inc., the retail consulting affiliate of Memphis, Tenn.-based National Commerce Bancorporation, allows the borrower to finance a 100% loan-to-value plus 3% in closing costs. The borrower does not have to pay any private mortgage insurance. (The lender pays mortgage insurance through an increased yield spread.) The borrower also benefits from the added income tax deduction from the additional yield required for the lender-paid mortgage insurance.
This product will go a long way towards allowing a borrower to purchase a larger home at reasonable financing rates. This will also help builders and Realtors get more borrowers qualified for new homes. What are the implications in the secondary market for the lender and the ultimate investor?
High LTV products do affect loan servicing portfolios. First, lenders will want to ensure that borrowers qualify for this product. They may prefer to sell the loan servicing released to a lender that has the expertise to service high LTV loans. The execution to the lender is critical to the marketability of the product.
However, many borrowers do not have enough information to evaluate the alternatives for their own best execution. Side by side comparisons of products including mortgage payment, discount points, tax benefits, mortgage insurance alternatives, investment opportunities, and financing all should be analyzed to view the total scenario.
The variables to consider are how long the borrower expects to reside in the home, prepayment penalties, the current housing market trends and investment opportunities available, and the opportunity costs of choosing one product over another.
Sales staff should be educated and have the proper tools to provide information to borrowers so they can make their own best execution decisions. This includes providing borrowers with information beyond 30-year fixed or intermediate-ARM payment structures.
In addition, the staff should be in tune with the borrower’s needs. Do they want a mortgage loan product that leverages their financing ability like the Pro Mortgage? Do they want a product that allows them to purchase a higher priced home? Do they want a product that offers a lower monthly payment so they can utilize the savings elsewhere?
A product that allows the borrower to benefit from below-market monthly payments throughout the term of the mortgage has immediate impact on their bottom line. The borrower could then use the savings to invest or to spend.
Lenders, borrowers share.
One product that offers below market payments and is guaranteed to create a niche is the SAM Mortgage. The SAM (Shared Appreciation Mortgage) carries a reduced interest rate and lower monthly payments than a traditional fixed- rate mortgage loan during its term. In exchange for these benefits, the borrower shares with the lender anywhere from 30% to 60% of the appreciation in the value of the home that occurs after taking out the SAM. The borrower shares the appreciation with the lender at the time the loan is repaid.
If the home appreciates in value, the borrower keeps the equity that was in the home at the time the SAM was originated plus loan principal paid plus the borrower percentage of appreciation 40% to 70%. If the home does not appreciate, or depreciates, when the borrower repays the loan, only the balance is due to the lender (tax advisors should be consulted regarding federal income tax considerations relating to a SAM).
SAM loans are available for home purchases, refinances and cash-outs and are designed for people with established credit ratings and a desire for innovative mortgages suited to their unique financial situations, objectives and expectations.
The SAM loan meets several borrower objectives. They include maximizing purchasing power for a first home, “moving up” to a larger home, and reducing monthly payments on a current home or diversifying assets.
The benefits to the borrower include:
- increased borrowing power,
- more housing choices,
- lower payments,
- utilization of savings towards investments, and
- fixed monthly payment, in contrast to the potential payment fluctuations with an ARM.
Does this sound too good to be true? The production sales staff may wonder, “what is the catch?” There are distinctions to this product that must be evaluated by each potential borrower to ensure that their goals for financing have been met. These goals should include determining the borrower’s plans to stay in the home, housing market pricing trends, and the opportunity costs of selecting this loan over traditional mortgage products.
For example, under terms of a SAM loan, a borrower might obtain a 30-year, fixed-rate mortgage with an interest rate of 6.5%, compared to 8% for a conventional mortgage. With a loan-to-value ratio of 80% for a conventional mortgage and an agreement to share 50% of the home’s appreciated value over the life of the loan, the same customer could borrow $250,500 and save $255 per month over the 8% loan*.
Or, he or she could choose to borrow $290,790, an additional $40,290, at the SAM rate, and enjoy the same monthly payment as the borrower of $250,500 at the conventional rate.
(*The maximum loan-to-value for this program is 95%, and mortgage insurance is required on loans with loan to values greater than 80%.)
The fixed interest rate on the loan is determined by the amount of shared future appreciation and the loan-to-value ratio. Generally, the higher the level of appreciation that the borrower agrees to share, the lower the interest rate (see accompanying chart).
As shown in the chart, the borrower’s purchasing power can increase by over 15% by taking a SAM mortgage at the same monthly payment level as the 30-year fixed in the above example.
What are the implications in the secondary market for these types of loans? Specifically, what must a lender have in place to efficiently produce these loans?
- Efficient and effective servicing staff and systems (or sell the product servicing released),
- Availability of housing market trends information,
- Sales staff that is knowledgeable about the product and can answer borrowers questions correctly,
- An understanding of the risks, and
- The lender or ultimate investor is taking a risk that the borrower’s home may not appreciate in value over the term of the loan. If a home does not appreciate, the lender may not earn a market rate of return. However, the lender may be expecting to make a number of SAMs on homes from areas all across the country that the lender anticipates will appreciate enough to compensate for the lower interest rate that the lender offers during the term of the SAM.
- The borrower will owe monthly payments during the course of the loan. At the time the loan is repaid, the borrower will owe the additional interest, from 30 to 60% of the appreciation that has occurred since the loan was originated, and any balance owed on the loan, and
- If the value of the borrower’s home appreciates a great deal, the SAM works out well for the lender, but the borrower may have paid more in the long run than they would have paid with a traditional mortgage (since they would have paid a portion of their home appreciation to the lender). However, they would also benefit from this appreciation because they keep a percentage of the appreciation. They would also have the advantage of a lower interest rate for the entire term of the loan, which made it easier for the borrower to finance a home of their choice.
Madeline Johnson-Oler, CMB is vice president national accounts/agency relations at Triad Guaranty Insurance Corporation. Ms. Johnson-Oler acts as liaison between Triad and the Government Sponsored Enterprises (GSE) in addition to managing selected, key national accounts. She is also responsible for managing relationships with investment bankers and Triad's strategic partners.
This article was previously published in the November 2000 Issue of Secondary Marketing Executive.
