Biweekly Loans May Head West : Fortnightly Mortgage Payments Can Save Substantial Interest
The chicken . . . the egg . . . the chicken.
As ageless as the argument is on the sequence of events here, it has its counterpart today in the mortgage market and a curious product known as the biweekly mortgage.
The argument of California mortgage lenders: The consumer is not interested in the biweekly mortgage, which speeds up the repayment of the principal, with substantial savings in interest.
But from lenders in other parts of the country: Consumer interest in the product is almost overwhelming--when the consumer knows about it.
The result has been a standoff on the West Coast even as the biweekly increases in popularity in the Northeast and Midwest.
The interest/no-interest controversy is about to be resolved here, however.
Simple Principle
A large wholesale mortgage banking firm--Mortgage Loans America out of Campbell, Calif.--is already immersing itself in the market through a network of 1,000 participating retail mortgage bankers, and the chief executive officer of San Francisco-based First Nationwide Savings hints strongly that “I wouldn’t be surprised if we’re not able to offer it by midyear, or so.”
Like the design of the egg, the principle of the biweekly mortgage is equally simple: Half the normal monthly payment for principal and interest on a 30-year mortgage is paid, instead, every other week.
The advantage to the home buyer? A dramatic saving in overall interest, an impressive reduction in the payoff period, and both achieved without the higher qualifying standards associated with a 15- or 20-year mortgage.
The idea sprang up with credit unions several years ago in Canada, where biweekly paydays are dominant, but which was fueled by the fact that under Canadian law no mortgage interest is tax deductible.
Making 26 Payments
No magic in it: It’s simply the result of making the equivalent of one extra monthly payment a year (26 payments, since every year has two months when biweekly translates as three payments instead of two), plus the fact that the principal on which interest is computed is being reduced at least twice a month instead of once.
For instance: A 30-year, biweekly $100,000 mortgage at 9% will pay the mortgage off in about 21 years (instead of 30) and save about $63,819 in interest.
In addition to the question of consumer interest (or lack of it), what has kept introduction of the biweekly mortgage from the West Coast, lenders agree, has been the complexity of the mechanics of it.
(Or, as Anthony B. Frank, president of the $11-billion First Nationwide, puts it: “to double the number of payments, even if it is all electronic, is still a big step”), and the lack of a secondary market for the biweekly mortgage.
Neither Fannie Mae (the Federal National Mortgage Assn.), nor Freddie Mac (the Federal Home Loan Mortgage Corp.), so far, are buying biweeklies.
Software Available
But neither argument, proponents of the biweekly say, has validity in 1987--the computer software is available, uncomplicated and economical, and a lively second market for biweeklies has already sprung up in the private sector.
As far as the mechanics of the biweekly are concerned, consider the fact that Eric J. Christeson, president of Marina del Rey’s Dynamic Interface Systems Corp. (DISC), is marketing his microcomputer software system, LoanLedger, in other parts of the country.
The software “packages” the know-how of setting up and maintaining biweekly mortgages for personal computers “and, for the first time,” Christeson contends, “makes it feasible for even a small lender to offer the biweekly mortgage.
“With LoanLedger, it’s practical to service a portfolio of as few as 20 mortgages. And, at the other end of the scale, as many as 2 million loans could be processed--although that’s not very likely. From a practical standpoint, though, we see our logical market as the lender servicing anywhere from 50 to 20,000 loans.”
Annual Subscription Update
The requirements? “The lender has to have a hard-disk computer, that’s about $6,000 worth of hardware, and LoanLedger--a seven-disk software package that sells for a flat fee, plus an annual subscription update to keep him (the lender) informed on changing regulatory requirements and phone support,” Christeson said.
“The whole thing is so simple that, quite literally, the less expertise the lender’s computer operator has, the better.”
While the basic LoanLedger package sells for $5,500, Christeson adds, the necessary hardware and a full line of other, more specialized, software (not needed by all lenders) can run the investment to about $25,000.
How one relatively small mortgage lender, the $750-million Minneapolis Employee’s Retirement Fund, is using LoanLedger is explained by John Chenoweth, executive director of the fund, which is one of only about two dozen public pension funds in the country to have the Government Finance Office Assn.’s certification.
Experimented With Program
“We’ve got about 18% of our assets in mortgages,” Chenoweth says, “and we’re in the process now of moving about $100 million of them from an outside bank to an in-house operation--which it’s now possible for us to do with LoanLedger.
“We started out, experimentally, with a $30-million biweekly program as an experiment, and our members went crazy over it. The first $10 million was oversubscribed in a matter of days.
“We didn’t have to do any advertising--we just circulated a letter explaining it. Once the consumer understands it, that’s all it takes. We feel the biweekly is the most imaginative program in the country--no red tape, no bureaucracy and no overhead.
“Ordinarily, you figure on three-eighths up to one-half a point for the servicing of a mortgage (or $200 at one-half a point on a $50,000 mortgage). Our servicing costs are about as close to zero as anyone in the country can get.”
Automatic Payments
Currently, he estimates, his retirement fund will save about $250,000 a year by servicing its own mortgages in-house.
“The key to the whole thing is through automatic payments--the home buyer’s biweekly check is deposited in a participating financial institution, and the payments are credited directly to us,” the Minneapolis fund administrator adds.
“The only other stipulation is that the home buyer, in addition to the automatic deposit, must also maintain a ready-reserve account with the institution. That means we’re getting 100% of our payment.
“The default rate? None in the first year, not even a one-month delinquency--and the national default rate, as I recall, is in the 2% to 3% range, or higher. No mailings, no coupons, no postage, no record-keeping.”
Consider Second Market
But, perhaps with the biweekly, smaller is better? Chenoweth, with a little over $100 million in mortgages, has none of the concerns about Fannie Mae and Freddie Mac’s non-involvement with the biweekly that a larger lender would have.
David Sullivan, president of Bridgeport, Conn.’s $1.1 billion Mechanics & Farmers Savings Bank, is such a lender, however, and must consider a second market--someplace he can sell some of the mortgages created to maintain his liquidity. Significantly, he remains every bit as enthusiastic as Chenoweth about the biweekly.
“We’ve already done $650 million in biweeklies, and we’ve got another $200 million in commitments right now,” Sullivan says.
“They’re extremely popular with home buyers--we’re operating at our peak capacity, and it’s strained.” Offering both 15-year and 30-year, fixed-rate biweekly mortgages, Sullivan’s MFSB gets around the apparent absence of a second market in head-on fashion: It created its own.
“We have self-registration with the Securities and Exchange Commission,” Sullivan adds. “This is a $450-million line that’s managed by Goldman, Sachs in New York, and they’re sold off as mortgage-backed securities that are double-A rated by both Moody’s and Standard & Poor’s. We did our second issue, a $75-million one, just a couple of weeks ago.”
Although both accepted and extremely popular in other parts of the country, the biweekly mortgage still remains an unknown marketing tool in California.
