Move on to Win the West for Biweekly Mortgages

“Anyone who takes out a 30-year mortgage--particularly with the new tax law changes--is doing himself a terrible disservice. The only way you can justify the 30-year mortgage is with a biweekly payoff.”

That statement explains why John Chenoweth, executive director of the Minneapolis Employees’ Retirement Fund, one of the top-rated private pensions funds in the country, went all out a year ago and took administration of his $100-million-plus portfolio of biweekly mortgages away from the bank that had been handling them and assumed the chore himself. A switch to 100% electronic transfer of funds was made possible, he concedes, through utilization of LoanLedger, a biweekly software package developed by Marina Del Rey-based Dynamic Interface Systems Corp. (DISC).

Speeds Repayment of Loans

Sometimes called “the Yuppie Mortgage” because of its appeal to young, upwardly mobile professionals and their interest in the fast buildup of equity in their home--enabling them to cash in on it and move on to a better home sooner--there is nothing mystic about the biweekly payment.

Instead of one monthly payment for mortgage interest and principal, as in the conventional 30-year mortgage, half the normal payment, instead, is collected every other week. The result is not simply the equivalent of one extra month’s payment being made each year, but the steady reduction of principal every 14 days instead of every 30 or 31 days.

Thus, at 9.25% interest, a biweekly $100,000 mortgage pays off in slightly more than 21 years, instead of 30, and saves $63,819 in interest. On a $200,000 mortgage, the interest saved is $127,637.

“And,” as G. Randall Kinst, director of secondary marketing for Mortgage Loans America, a large wholesale mortgage banking firm located in Campbell, Calif., says, “a 30-year conventional loan would need an unheard of 6.7% interest rate to achieve the same savings realized on a biweekly.”

Essential to the biweekly mortgage, however, is the computer hardware and software which makes it possible for the lender to tap, electronically, into the home buyer’s bank account every other week and debit the mortgage payment directly.

Normally, but not always required, is the direct deposit of the home buyer’s biweekly paycheck.

No postage, no coupons, no manual bookkeeping at all and “a delinquency rate,” according to Haden Edwards, the Bedford, N.H., based producer of the LIFT biweekly mortgage package (Less Interest Faster Term), “that is almost nil--about one-fourth of 1% versus a national average of about 5.3%.”

Higher Incomes Required

While a buildup in equity and fast payoff comparable to the biweekly can be achieved, or bettered, through the more conventional 15-year, or 20-year mortgage--a secondary market for which already exists with Fannie Mae--both require much higher incomes on the home buyer’s part to qualify.

Using the secondary market’s normal standard--monthly principal and interest should not exceed 28% of the home buyer’s gross monthly income--a monthly income of $3,003 will qualify a buyer for a 30-year, 9 1/2% $100,000 biweekly mortgage (whether conventional or biweekly). But for a conventional 20-year mortgage he will need a monthly income of $3,329, or for a 15-year mortgage, an income of $3,729.

Ironically, as mortgage interest rates rise--as they have, dramatically, in the past couple of weeks--the appeal of the biweekly increases too, since both payoff time and interest savings move in inverse relationship to interest rates. At 9.25%, the 30-year biweekly pays off in a bit over 21 years, at 12% it pays off in 18.8 years.

Born in Canada

And while home mortgage interest remains tax deductible, the new tax changes, as Minneapolis’ Chenoweth noted, give the biweekly two more attractions. Previously, depending on the home buyer’s tax rate, Uncle Sam could be picking up as much as half of his mortgage interest costs.

Under the new tax law, however, he will be picking up no more than 28% to 33% of the cost. It is hardly a coincidence that the biweekly had its birth in Canada, where no mortgage interest is deductible.

At the same time, however, since mortgage interest does remain deductible, it has stimulated consumer interest, too, in the home equity loan as a general purpose financing tool--putting still more urgency in building up home equity fast.

But as popular as the biweekly mortgage has become in other parts of the country, California lenders remain cool to it, citing primarily the lack of a secondary market for biweeklies, but reflecting, too, a reluctance to return to fixed-interest mortgages of any kind--the keystone to biweekly programs being offered in other parts of the country.

Not Much Demand

As a spokesman for Glendale Federal Savings & Loan put it: “I don’t want to call it a gimmick, but in the California market there isn’t much consumer demand for the biweekly, and if our competitors aren’t forcing us to get involved in it, then we don’t really have much incentive, ourselves, to get into something new like that. We’ve been very successful as an ARM (adjustable rate mortgage) lender and, as such, our aim is to keep our product line as simple as we can.

“I know that in other parts of the country lenders have gone to totally fixed rates, and there, I could see that it might be desirable to come up with something unique, and a biweekly program would be a logical way to go.”

While it is true that both of the major secondary markets, Fannie Mae (the Federal National Mortgage Assn.) and Freddie Mac (Federal Home Loan Mortgage Corp.) have remained aloof from the biweekly mortgage, neither has slammed the door on it.

As a spokeswoman for Freddie Mac puts it: “We’re continuing to study the viability of it, so we don’t know what the future is at this point.

“But,” she concedes, “they seem to be growing in popularity with both borrowers and lenders, so we’re going to continue looking at them.”

And Dennis Campbell, vice president of marketing for Fannie Mae, also hedges: “We don’t rule the biweekly out . . . we’ve certainly been looking at it, but I guess you could say that it’s still in the laboratory stage with us. I’m certainly not saying that it can’t be done.”

Mortgage Banker Meeting

And, in the opinion of Dan Hardy, general counsel of the Minnesota Mortgage Bankers Assn. in Minneapolis, the first such trade group to sponsor, recently, a full seminar devoted exclusively to the biweekly, “all we really need is for either Fannie Mae or Freddie Mac to open up this market, and you’re going see probably 200 lenders jump on the bandwagon overnight.”

But, even as the two major secondary markets--to whom most lenders sell off the bulk of the mortgages they originate--remain on the sidelines, at least for the moment, California’s sole entrant into the biweekly mortgage, Mortgage Loans America, is following the strategy of other biweekly originators in other parts of the country.

It is simply stepping around Fannie Mae and Freddie Mac and going directly to Wall Street.

Like Mortgage Loans America, which began a month ago marketing fixed-rate biweekly mortgages through a statewide network of 1,000 retail mortgage bankers, Mechanics & Farmers Savings Bank in Bridgeport, Conn., with $650 million in biweeklies already in force and another $250 million in commitments, are both funneling the mortgages to the New York financial house, Goldman, Sachs & Co., which, in turn, is packaging them in blocks and selling them into the investment community as mortgage-backed securities.

Mechanics & Farmers President David Sullivan takes a dim view--charitably--of the reluctance of California lenders to get into the fixed-rate, biweekly market.

Adjustable Rates Favored

“California’s lenders want to go entirely with the adjustable rate, but the consumer wants fixed rates. They take the position out there that if the home buyer can’t get fixed rates he’ll have to take the adjustable whether he wants it, or not,” he said.

“The whole thing, is reminiscent of the Chrysler Corp. in the ‘50s when it said: ‘We’re going to make big, black, long automobiles, and if the buyers don’t like it--tough!’ So all the buyers went to Volkswagens.

“Lenders out there are supposed to be so innovative when, actually, all of the new ideas on the financial side, particularly in the thrifts, are coming out of the Northeast.”

Heel-dragging or not, though, California’s lenders may soon be coming under increasing pressure to dip into the biweekly market as Mortgage Loans America begins its statewide, $50-million-a-month commitment to it (see related story), and as the president of San Francisco’s $11-billion First Nationwide Savings, Anthony M. Frank, hints of a midyear test of the market by his institution.

‘Here to Serve People’

“We’re a portfolio lender,” Frank observes, “so we have no need to sell them in the secondary market, anyway.

“After all, we’re here to serve people . . . we’re customer-driven, and if the biweekly makes sense to the public, we’re going to have to offer it.”

Which would certainly make sense, too, to John Chenoweth of the Minneapolis Employees’ Retirement Fund, who has been in the biweekly market for more than a year.

“If a little pension fund like ours can do these things, the big banks and S&Ls; are going to look pretty bad if they can’t at least match us. We’re not even supposed to know anything about this sort of thing.”