Political rivals join up to assist low to moderate-income borrowers
The ultimate odd couple has come together to introduce a viable mortgage which could help low-to-moderate income borrowers build wealth instead of accumulate debt. Bruce Marks, a liberal consumer advocate and head of the Neighborhood Assistance Corporation of America (NACA), and Ed Pinto, a conservative housing critic at the American Enterprise Institute (AEI) have teamed up to help solve the difficulties of home-ownership for low-income borrowers.
Although typically these two don’t agree politically, they introduced the “Wealth Building Home Loan” product at a mortgage conference in Raleigh, N.C. NACA has contracted Bank of America (BofA) to originate the loans through a program starting in about 60 days. BofA plan to keep the loans on its balance sheet and subsidize the interest rate buy-down; this is to ensure the affordability of the 15-year mortgage. The loans will initially be available through 37 national NACA offices where borrowers are also counseled.
“One of the main reasons the 15-year loan hasn’t become standard in the country is it’s not affordable, but this aggressive buy-down of the interest rate makes it affordable,” Marks said in an National Mortgage News interview.
“If you’re low-income, the opportunity to build wealth by buying a house is very difficult,” Pinto said. “The 30-year loan doesn’t build wealth reliably because it amortizes slowly and house prices are incredibly volatile. But a 15-year loan means more money is going to pay principal rather than interest.”
No down-payment is required, but borrowers can ‘buy-down’ the interest rate by putting down some cash up-front. For every one percent of the loan amount provided up-front by the buyer or seller, the interest rate is permanently lowered by one-half of a percentage point for the duration of the loan. The borrower wouldn’t have any closing costs or loan fees, there is no minimum credit score required and the maximum mortgage amount for a single-family home is $200,000.
According to an AEI estimate, this mortgage product could reduce foreclosures by 70 percent compared to a 30-year mortgage. Much of this is due to buyers building equity much faster, which means they’re less likely to owe more than what the house is worth. Another contributing factor in lowering the odds of foreclosure is applying ‘Common-sense underwriting’ in determining whether the borrower can afford the mortgage. Financial institutions may find this aspect of the loan appealing in addition to NACA’s very strict debt-to-income (DTI) guidelines, which is typically 41 percent. The pilot program will not have any government subsidy for now.
Pinto has been critical of government-backed loans for years; positing that borrowers have too much leverage and debt which raises the possibility for foreclosure.
“Instead of using high leverage and high debt ratios to put people with vulnerable incomes and poor credit into loans, we’re structuring the loan to build principal and equity rather than paying interest to the lender. We think this can be a game-changer,” Pinto said.
“This goes up against the established Washington housing industry because you’re allowing the investment [down payment] from the home-buyer to have more impact. If you look at the amortization for 30-year mortgage, you only get significant equity in year 15. But with a 15-year mortgage, you have equity at seven years,” Marks said.
Pinto hopes to eventually get the federal government to help up to 500,000 low-income borrowers buy down their interest rates through a yearly $6 billion tax credit. He admits that this may be a difficult goal to achieve for the initial pilot program.
Do you think this mortgage product will be viable?
Origination News. “Unlikely Bedfellows Create 15-Year Loan for Low-Income Borrowers”
News Observer. “Innovative 15-year mortgage aims to be more affordable”