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Can the Wealth Building Home Loan Re-Animate the Mortgage Market?

Phil Hall
Sep 10, 2014

There is no nice way around it: The latest mortgage application data is atrocious. However, the introduction of a new product potentially holds the promise of revitalizing a purchase market that seems to be weakening by the day. According to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending Sept. 5, the Market Composite Index decreased 7.2 percent on a seasonally adjusted basis from one week earlier, to its lowest level since December 2000. On an unadjusted basis, the Index decreased 17 percent, compared with the previous week. The seasonally adjusted Purchase Index decreased three percent from one week earlier, to its lowest point since February 2014, while the unadjusted Purchase Index decreased 14 percent compared, with the previous week and was 12 percent lower than the same week one year ago. The Refinance Index decreased 11 percent from the previous week, to its lowest level since November 2008, while the refinance share of mortgage activity decreased to 55 percent of total applications from 57 percent the previous week. The MBA data included an adjustment for the Labor Day holiday. The continued stagnation of the mortgage market can be traced to many issues, most notably the lack of variety in today’s product offerings. These days, most originators seem to be serving what is euphemistically known as “plain vanilla” mortgages–occasional bits of spice, like jumbo mortgages or reverse mortgages, are only adding a trace of variety to a predominantly bland slate of product offerings. Earlier this week, a bold new idea in home loans was formally introduced. Dubbed the Wealth Building Home Loan (WBHL), the product is unusual for two key reasons: It targets low-income borrowers–an ironic consideration since this demographic have been mostly shut out of homeownership following the 2008 crash–and it is not the creation of a mortgage originating entity, but of a right-of-center Washington think tank. The WBHL is the brain child of Edward J. Pinto and Stephen D. Oliner, co-directors of the International Center for Housing Risk at the American Enterprise Institute (AEI). In an exclusive interview with National Mortgage Professional Magazine (which will soon be broadcast online on The Housing Show, a new program on the Mortgage News Network), Pinto explained that the 15-year, fully amortizing, fixed-rate WBHL achieves goals that that 30-year loans fail to achieve. “It has the buying power that is pretty close to what a 30-year FHA loan had,” Pinto said. “But, it builds wealth very quickly because of the 15-year amortization. The problem with the 30-year loan is twofold: One, it is a very slowly amortizing loan. And, two, it is combined with very high leverage–both debt-to-income (DTI) and low downpayment—and all of that together leads to a lot of risk. And, it is used to buy a very volatile asset—namely, a home. Chip Case, of the Case-Shiller Index, was quoted in July as saying that buying a house is a crap shoot because you are “only buying one address—a single address—and it is not diversified, and it is incredibly volatile.” According to Pinto, the WBHL’s 15-year loan rate is 0.75 percent below the FHA 30-year rate. He added that the annual credit risk expense on the WBHL is lower, while a maximum loan-to-value ratio) of 100 percent allows for repurposing the five percent in downpayment funds for a 1.25 percent permanent rate buydown. He also stressed that loan’s savings component, hence its “Wealth Building” moniker. “If you do a 15-year loan the way we suggest doing it, 77 percent of the principal and interest goes to principal,” Pinto explained. “So, if you’re paying $1,000 a month on principal and interest, $770 is going to principal repayment. On the 30-year loan, 67 percent is going to pay interest. If you think about the principal repayment [on a 30-year loan], you are moving money from your left pocket to your right pocket.” The AEI is now working with then Neighborhood Assistance Corporation of America (NACA) and Bank of America on pilot programs. “Over the next month, it is expected to be in NACA’s offices,” Pinto said. “And we’re talking to other lenders about doing both traditional low-income programs and a middle-income or no-income associated program that anyone can utilize.” Pinto, who was a former executive vice president and chief credit officer at Fannie Mae and president and CEO of the Independent Community Bankers of America (ICBA) SmartLender LLC, noted that the philosophy and design of the WBHL is based on reverse engineering the past half-century of U.S. housing finance policy. “The policy we’ve had for the last 50 years is a very strange one for housing,” Pinto continued. “We’ve basically said: ‘We want to drive up the homeownership rate. And the way we’re going to do it is by putting low-income people with volatile incomes into highly leveraged loans.’ And low-income homes are even more volatile. We’ve looked at Zillow and every city we’ve checked the low-income price range was much more volatile and had bigger declines than the high-income homes in the same city. That’s a crazy policy and it hasn’t worked. “If we look back, our homeownership rate grew from 44 percent in the 1940s to 62 percent in 1960,” Pinto added. “And that was a period when we had very conservative, rational underwriting standards—not a lot of leverage. Starting in the 1960s, we’ve been practicing this curious policy of adding more and more leverage—and as home prices have gone up, we’ve been chasing our tail by adding more leverage. The result is something that everyone is familiar with: we had a huge boom, houses became unaffordable, and we had a huge crash – and we’re still recovering from that huge crash. Einstein said, ‘When you look at a problem and what causes the problem, the chances are you cannot solve the problem with more of the same.’ What are we trying to do today? We are trying to solve a problem we created with too much leverage. With what? More leverage. The Wealth Building Home Loan says, ‘Let’s put a reverse on what we’ve been doing wrong for the last 50 years. What we really need is a shorter-term amortization and let’s make that work.’” More information on the WBHL is available here on the AEI Web site. 
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