Flexible loans:
Reducing, Skipping payments not a fantasyLast
week I had little good to say about fannies
maces new Payment power program (pop), Which
allows a borrower to skip up to two mortgage
payments In any 12-month period, and up to 10
over the life of a loan .A Skipped payment plus
a healthy access fee, tacked on to the Balance.
As an emergency source of funds, it is much
more Costly than accessing a home-equity line
of credit (HELOC).My view is that borrowers
don't need a high-cost way to Borrow for emergencies.
What they need is a no-cost way to Accumulate
a reserve within their existing mortgage that
would Allow them to skip or reduce payments
when necessary.
A truly Flexible mortgage
would provide this. Here is how it would work:The
flexible mortgage would base the borrowers payment
Obligation on the loan balance. A schedule of
required Balances, declining month by month
over the life of the loan Would be part of the
contract. If the borrower made would bePart
of the contract. If the borrower made all the
scheduled Payments his balances month by month
over the life of the loan Would be part of the
contract.
If the borrower made all the
Scheduled payments his balances month by month
would Correspond exactly to the required balances.But
if he paid more in some month, his actual balance
would fallBelow the required balance, the difference
constituting a "Reverse account "
which he could draw on by paying less later
On.
For example, the loan is for
$160,000 at 5.5 percent for 15 Years, with a
monthly payment of $1307. The borrower receives
A bonus every Christmas from which he pays an
extra $1,000 On his mortage.with each extra
payment, the gap between his Actual balance
widens. If he does this five years running and
Then loses his payment entirely in months 72,73,74
and 75,and In month 76 he can pay only $575.At
that point, the actual Balance and required
balance and required balance are Equal, so his
"reserve” is exhausted.Or suppose
the borrower inherits $10,000, which he decides
To use as an extra payment in month 12. If he
falls sick in month 37,he can skip eight payments
and most of a ninth before his Reserve is exhausted.
In many cases, a borrower wants only to reduce
the payment, as Opposed to skipping it entirely.
If the borrower who prepaid $10,000 in month
12 needed to cut his payment from $1,307 To
$1,000 starting in year 4,he could do it for
39 months before Exhausting his reserve.
The beauty of the flexible mortgage from a
borrower's Perspective is that once he gets
ahead of the game, his Payment can be anything
he wishes. The only limitation is that the Actual
balance must stay below the maximum balance
each Month.This flexible mortgage is not rocket
science. The numbers cited Above were drawn
from an excel spread sheet that required Only
a minor add-on to an existing amortization spread
sheet. The payment option adjustable-rate mortgage
(ARM) that many Lenders offer today is far more
complicated.Servicing a flexible mortgage presents
only modest challenges.
At a minimum, the lender would have to inform
the borrower of The minimum payment required
each month, something they do Now on option
Arms. It would not be difficult to provide a
Wider range of possiblities, or to allow borrowers
to test there Own preferences by accessing their
account over the Internet. Because the borrowers
obligation on a flexible mortgage Is defined
in terms of the balance rather than the payment
Delinquency and default would also be defined
in this Way. Delinquency would be a single occurrence
where the Actual balance exceeded the required
balance, and default Would be a succession of
months (perhaps three) in which this Happened.
The flexible mortgage encourages borrowers
to save nuts for The winter. Hence, I would
expect that both delinquencies and Defaults
would be lower than on current loans.Some lenders
in the United Kingdom, Australia and South Africa
Provide mortgages with much greater payment
flexibility than Anything available in the United
States. At least one large lender In South Africa
allows complete payment flexibility so long
as the Balance does not exceed the original
balance, which is much More radical than using
a declining required balance.
