Home : Blogs : Brian Brady- America's VA Home Loan Broker : America's #1 Mortgage Broker

Portable Mortgages Permit Predictable Payments

Portable mortgages are an idea that makes sense...maybe. The concept is simple. You get a home loan at a 30-year fixed rate. If you lock-in when rates are low, you keep that rate for the life of the loan and transfer the loan to a new property.

Borrowers would love it because it makes them feel that the loan they "earned" stays with them forever. Secondary markets (the ultimate purchaser of most loans) and banks, won't love this idea.

Portable mortgages are available in Canada. E-Trade Financial experimented with this loan product in 2003. They charged borrowers a rate premium of .375% to guarantee that portability. That means that if the "market rate" was 5.5% in 2003, the borrowers who optioned to take the portable mortgage, received a rate of 5.875%.

The rate premium was charged to appease the secondary markets by providing them the extra money to hedge the interest rate risk. The interest-rate risk for the investors could be hedged through mortgage derivatives or a collared options strategy. I'm not exactly certain how that strategy will work so I'm asking Pat Kitano to comment; he was a capital markets guy on Wall Street (I was a consumer markets guy) so he might have an interesting take for us money geeks.

What are some of the problems ?

Posted by Brian Brady- America's VA Home Loan Broker on 06/01/2007 07:10 AM

Comments (27)

san diego mortgage broker, long beach mortgage broker portable mortgages

Originally posted at: America's #1 Mortgage Broker: Portable Mortgages Permit Predictable Payments

27 Comments on Portable Mortgages Permit Predictable Payments

JUN

2007

Interesting discussion, Brian.

I like the idea. I can see where there would be a market for it.

Very interesting. ALL of which points to the fact that mortgage lending is more complicated than the average consumer understands it to be, further pointing out the need for honest, knowledgeable loan officers.

All too often, I have had lenders try to push a particular instrument, "loan de jour", on my buyers. This is usually limited to new home builder's mortgage companies.

TOTOH, I have had loan officers have money to lend that they "purchased" at particularly good rates for specific instruments and my buyers benefited greatly.

I'm sticking to real estate sales.

Brian interesting post. I agree the down side I could see is as people buy and sell homes and the move to a more expensive home they would have to figure out the blended rate.

My clients would grill me for as much info about the loan as possible, just to turn around and complain that they cannot afford the .375% rate adjustment.

Yes, there is a market..... albeit a small one.

you can probably scrap this.

I like the idea..but it seems it would only benefit an owner that goes into an even exchanged property...price wise but can they get the same thing for what they have now and what would the benefit be other than the rate. I currently have a 30 yr 5.875 no prepayment penalties at all..my creidt is in the mid 800's. I guess this would only benefit me if the rates were at least 2 points higher now.

Good post Brian and an interesting topic indeed. And you are right, Philadelphia is so far behind in recording deeds. Since Mortgage brokers like myself don't make a dime off servicing a loan, of course that will be an area of resistance.

More so than those things though, I think ultimately a 'savvy' new approach to mortgage products with the introduction of things such as the Portable Mortgage has to be dissected from soup to nuts before ever rolled out. It has too many potential downfalls for my taste and I agree with your conclusion.

Great insight by the way!

I like the idea. In fact I think if this was the case I would sell it as a Loan Officer to some clients. I think it would work well for the people that think they will be moving up in housing in a few years.

As for the equity Harvesting. This would still be able to be done and a Broker would just need to understand the concept and know how to use second mortgages better. Not that it is ideal, But could still work.

A rather intriguing idea and definately a rather "niche" product offering.

mortgage brokers will hate it... but consumers will hate it eventually when the first one of them tries to transfer and their credit is hurt and they no longer qualify at that rate.

Just like an assumption fee, the person that assumes the loan has to qualify, right?

So with the "down sizing" issue - if this is someone that has retired and has no active income it could be an issue in qualifying for the loan to be transferred.

I saw the Title of your Post, and thought hey, there's a great idea....like when the phone companies allowed you to port your old number. Maybe it's not for everyone, but I think it has benefits, I like the idea, and if Mortgage Brokers lose money, I am sure they would find it somewhere else.

Brian, thanks for the ping...

I worked mostly on the deal side on Wall Street, not capital markets, between 1990-98. I did what every analyst would do in checking how the loan packagers would hedge the portable mortgage risk of getting caught in a rising interest rate scenario - googled it.

I note that in 2004 the architect of the E*Trade product, Eric Christiansen, moved to AFT, a mortgage analytics company that has products to monitor the interest rate risk associated with interest sensitive loan products - (ask any trader - hedging interest rate risk is easy, it's all in the real time monitoring to ensure portfoliios don't go haywire) -

http://www.securitization.net/software/article.asp?id=437&aid=4006

"Mortgage prepayment valuation is the most important risk factor for lenders, and is trending to become more rather than less so," said Eric Christensen. "AFT is established and positioned to provide this critical service in a way that enables mortgage lenders to both understand and act on their findings [...]

Its expert scoring with a deep and growing database of mortgages greatly enhances the accuracy of projecting prepayments for keener insight into mortgage values and future behavior. The results are that mortgage lenders now have the capabilities to target their requirements of uncovering and also responding quickly to market trends by more accurately valuing portfolios, hedging against prepayment risk, and deploying effective portfolio retention strategies. "The mortgage finance industry daily deals with a very large and at times unpredictable marketplace," said Eric Sprink, at American West. "AFT's risk management methods help not only to identify trends, but to actively take steps to manage the inherent though not always known risks as those trends are uncovered."

In any case, I don't think ETrade offers this product any more (it just won't sell because consumers don't see interest rates heading way higher in a potentially deflating economy that may require interest rate cuts). I would think portable mortgages make a lot of sense during low interest rate periods - consumers can see the value. Maybe next time...

Thanks Brian for this new mortgage portfolio it sounds great and interesting product.

Thanks, Pat for the insight. I didn't know you were a deal guy but that explains two things:

1- You're a serial networker

2- You're business model analysis on TransparentRE is some of the best I've read.

It is a rare individual who can understand, analyze, and recommend real estate technologies and present them in an easy-to-read table. You can read my attempts for hours or save yourself a lot of time and look at Pat's tables on TransparentRE.

I appreciate the help on this.

Hi Brian. It does seem like a there is a potential market there. If it worked at all, it would probably work best for empty nesters looking for a smaller home I would imagine. Most other borrowers would rather move up in a home and then you have the higher blended rates to deal with as you stated. Very interesting concept thanks!

Brian.... wow, I have never heard about this before. Very interesting. I guess being some what conservative as yourself, I would agree....overall, it won't have much of an impact on our market. But then again, all it takes is some true sales people, if they can make money off of it or even more, like the Pay Option Arms, that people will buy into the idea. Especially when some of these programs aren't made for everyone. And Patrick makes a key comment at the end of his comment.

jeff belonger

This could be an interesting product for the baby boomers who will be scaling down over the next decade or so.

Hadn't seen a discussion on this product before. Still, I think its a niche product that could have appeal to certain people...maybe folks who know they have to move every few years? Still the problems you cite (higher or lower prices depending on market) could come into play...

Brian,

We use to do this, we called it substitution of collateral. When we dealt with local banks and S & L's we did a lot of neat thing, but I wouldn't want to go back.

Rates also use to be stable. Today, we'd have to forget the lessons of the last twenty years, we've seen rate changes of at least 15%, from 5.5 (some even lower) to 21.500% (some even higher) for the same loan. We've seen banks pay depositors from less than 1% to over 12%, all in less than the potential life of a loan.

3/8s would not be enough to off set the risk to the lender. 3/8s is to much to ask of the consumer for a guarantee that can't be depended upon. This is a formula for bank failure, and we all know who pays for that.

What most people don't know is you can substitute collateral and assume loans now! It only takes three things:

1. You have to track down the loan, and locate the owner.

2. You have to have the testosterone necessary to ask for what you want.

3. It has to be in the best interest of the lender to agree!

Barring horse heads in bankers beds, this means that if a loan is considerably higher than current market rates you can do almost anything.

I advocate including substitution of collateral (it's included in "One House At A Time...") when arranging seller carry backs, it would work well with hard money also. But banks make 30 year loans knowing most will be paid off in 3 to 7 years and few will go much longer.

Comparing us to Canada is absurd. Canada is a socialized country. We think because they look like us and most speak Midwestern English, A, (I suspect I'm related to at least half of those that don't) that we are the same we're not. While our mortgage market varies from great to bad theirs goes from bad to worst. What may work well in Canada is not necessarily feasible south of the boarder.

Can you envision a bank's portfolio fixed for 30 years and Nancy, Harry, and Billary in control of the country?

Today banks share the risk with consumers this system would put all the risk on the bank.

Intreasting post.

Bill

Thanks for the informative post!

good post... very informative

interesting idea. You can get baloon seconds at 6.00 like 5/30 baloon.

Wouldn't it have a transfere fee??

I don't know, Ethan. I'm just floating the idea out there and am grateful for your comments and insight. It's just an idea right now. I'd imagine we'd want to charge a transfer doc fee, wouldn't we? We charge fees for everything else.

Hmm, that sounds like a disaster waiting to happen to me. Interesting though.

JUN

2007

Brian, I always enjoy reading your blogs. You manage to come up with so many different interesting topics. I can see where the logistics of this kind of loan would sound better than it would work. In theory it sounds a great as taking your first tax bases with you for a lifetime----a wonderful dream of mine!

JUN

2007

Thanks for the kind words Brian... I read your BB blog daily on the Google Reader, but miss your excellent AR pieces because I just learned one can subscribe to AR blogs... your prolific writing is mind boggling...

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?