Creating a Market for Biweeklies : Advantages Cited in Speedier Payoff of Home Mortgages
What better testament to Spinoza’s observation that “nature abhors a vacuum” than in the varied attempts made by California homeowners in the last couple of years to utilize the biweekly mortgage, even though, technically, no market for them existed?
“Biweekly,” the “Canadian plan,” the “payday mortgage” . . . whatever label it carried . . . the concept of sharply reducing the payoff of a home mortgage and saving thousands of dollars in interest by making one-half the normal monthly mortgage payment every other week, instead of once a month, fired consumer interest here in spite of the disinterest of conventional lenders.
And even before the announcement last week by Mortgage Loans America, the Campbell, Calif.,-based wholesale mortgage banker, that it had launched a formalized market for biweeklies through a network of about 1,000 retail mortgage bankers (see related story on Page 1), homeowners were already trying to implement the idea.
“I’d guess that there are about five companies around Southern California that have been marketing--with fair success--some sort of biweekly,” according to Chris Murphy, a Corona del Mar consultant on biweeklies.
“At least one of them has been putting together ‘simulated’ biweeklies. In other words, it simply sets itself up as a trust, collects biweekly mortgage payments from its clients and then turns around and pays their lender the regular monthly payment.
Linked to Insurance
“There’s no refinancing, and it isn’t a true biweekly because the principal isn’t being reduced every 14 days, as it would be with a real biweekly. What it amounts to is simply one extra payment a year being made on the mortgage, so it’s slower--by about seven months--in paying off the mortgage.”
Another “closet” version of the biweekly being sold in Southern California, Murphy continued, is actually a “hybrid” version of it because the key is not the mortgage itself but a tandem universal life policy.
“The buyer refinances his 30-year mortgage--say from an 11 1/2% variable to a 9 1/2% fixed rate. On a $100,000 mortgage that would reduce his payments from about $1,200 to $1,000. But he continues to pay $1,200, and the difference--$200 a month--is going into the premiums on a universal life policy. And this, of course, isn’t a taxable event,” Murphy said.
“At the end of about 14 years the accumulated cash value--also not taxable--has reached the point where the home buyer can borrow it out and pay off the balance due on the mortgage. Under his original mortgage he’d have an equity of about $3,800 in the house after five years. Under this arrangement--utilizing the universal life policy--he’d have an equity of about $22,000 after five years.”
‘Intrigued With Idea’
But Mortgage Loans America, which quietly entered the mortgage market about a month ago with a true biweekly--a 30-year, fixed-interest mortgage, except that half the normal monthly payment for principal and interest will be deducted from the buyer’s bank account every other week.
“I became intrigued with the idea in the fall of ‘85,” G. Randall Kinst, director of secondary marketing for MLA, said, “when I read a story that described it in the real estate section of The Times on a flight back to San Francisco from Los Angeles.
“So, I started a survey of lenders back East who had had experience in it--in the origination, the marketing, the computer hardware and software that was needed. All of the details. I was particularly looking for negatives. And, frankly, I couldn’t find any.”
Just how dramatic the impact of a biweekly mortgage can be was emphasized by Kinst: “By the time your biweekly mortgage is paid off, a conventional 30-year loan will still have 60% of the principal left unpaid.”
Secondary Placement
The next step in Kinst’s research was to explore the tricky secondary marketing of such mortgages--complicated by the fact, so far, that neither the Federal National Mortgage Assn. (“Fannie Mae”), nor the Federal Home Loan Mortgage Corp. (“Freddie Mac”) has entered the biweekly field.
“But then we talked to Wall Street--specifically, Goldman, Sachs & Co., which has been a leader in packaging biweeklies for investors as mortgage-backed securities, and it began falling into place.”
Despite a mortgage market that has turned erratic--and shooting upward--the past couple of weeks, Kinst said, “we’re offering financing and refinancing in the 10%-to-10 1/2% range. Which is certainly competitive, today, with conventional mortgages. Origination fees are set by the retail mortgage bankers putting the deals together, of course, but will be in the two- 2 1/2-point range.” (Between 2% and 2 1/2% of the loan.)
Also, despite the erratic current market--”it could come down in the next couple of weeks, of course, just as easily as up” Kinst added, MLA is offering an option between a 30- or 60-day commitment on the rate.
New and Old Loans
Available on both new financing and the refinancing of existing mortgages, MLA’s biweekly program currently goes up to $400,000--”although in some special circumstances we can go up to $500,000,” Kinst added.
As in conventional refinancing, MLA will lend up to 80% of the home’s appraised value, or up to 65% of the value if the owner takes “cash out” of the transaction--refinances for more than the balance actually due on the mortgage (equity permitting) and pockets the difference.
With a current volume of about $50 million a month in traditional mortgage banking business, Kinst estimates a virtually doubling of this--exclusively in biweeklies--”within the next 90 to 120 days.
“We’re not originating the biweeklies ourselves, of course,” he continued, “and home buyers who are interested should go through their realtor for the names of participating mortgage bankers.”
Two examples of participating mortgage bankers: San Miguel Lending Group in Chatsworth and Western Bank Mortgage of Long Beach.
No Negatives Discovered
“We’re tremendously excited about the potential here,” San Miguel’s Vicki Briskman said. “MLA’s an excellent wholesaler and, like them, we looked at the biweekly program long and hard trying to find some negatives. And, like them, we couldn’t find any, either.”
Once a participating mortgage banker has originated the biweekly package, Kinst said, it will be submitted to MLA “and approval--and conditions, if any--shouldn’t take more than two or three days on our part. There’s no private mortgage insurance required, there’s no prepayment penalty, and closing a deal--from beginning to end--shouldn’t take any longer than the closing of a conventional mortgage.”
There’s only one rigid requirement in the biweekly mortgages that MLA will handle: the lender involved (bank, savings and loan, etc.) must be a member of ACH--the Automated Clearing House--which makes possible not only the electronic transfer of principal-and-interest biweekly payments, but which already services a host of other forms of electronic transfers between and within, financial institutions--direct deposits, automatic savings, loan payments, etc.
“Most of your lenders are already members of ACH, of course,” Kinst said, “although it’s possible that some credit unions aren’t tied in. One interesting thing we discovered in our research of the biweekly,” he added, “is that approximately 80% of all California wage earners are paid biweekly, which makes them a natural for such a program.”
And, in Minneapolis, John Chenoweth, executive director of the Minneapolis Employees’ Retirement Fund, which went exclusively to biweeklies in its mortgage portfolio a year ago, speculated recently about the impact of a similar involvement here:
“Can you imagine, if all the 30-year mortgages in California were converted to biweeklies, how many billions of dollars would be saved that could go into other spendable consumer needs? It would be mind-boggling.”
