Garnet Capital Advisors Blog

Earlier this fall, prominent members of different interest groups announced the creation of the Wealth Building Home Loan, a mortgage specifically designed to help low - to moderate-income borrowers accumulate equity.

By opening up mortgage financing to potential homeowners in this demographic, the new product could expand housing availability, and bolster loan origination.

Innovative mortgage announced
Ed Pinto, a conservative housing expert at think tank the American Enterprise Institute, and Bruce Marks, a liberal consumer advocate who leads nonprofit community advocate Neighborhood Assistance Corporation of America, announced the new product at the American Mortgage Conference, according to American Banker.

During the event, several leaders in the field of mortgage lending lauded the creation of WBHL, Pinto wrote in a HousingRisk.org blog post on the AEI website. They include:

• FHA Commissioner Carol Galante
• Former FHFA director James Lockhart
• Joseph Smith, monitor for National Mortgage Settlement of the State Attorneys General and Lenders
• David Stevens, former FHA commissioner and Mortgage Bankers Association CEO

Lewis Ranieri, considered the "godfather" of mortgage finance, mentioned the new product in his keynote speech, stating that what really stands out to him is the wealth building aspect. He emphasized the WBHL could help more Americans fill their homeownership needs.

New opportunities
While 15-year mortgages are frequently unaffordable, the interest rate buy down makes the innovative new loan economical for a wider range of potential homeowners, Marks stated in an interview, according to American Banker. Pinto also noted the possibilities created by the WHBL.

"If you're low-income, the opportunity to build wealth by buying a house is very difficult," he stated during an interview, the media outlet reported.

Wealth creation
"The 30-year loan doesn't build wealth reliably because it amortizes slowly and house prices are incredibly volatile," Pinto added, according to the news source. "But a 15-year loan means more money is going to pay principal rather than interest."

As for how much more, AEI figures show that during the WBHL's first three years, 77 percent of monthly mortgage payments go to paying down principal, and the remaining 23 percent is used for interest. Comparatively, 68 percent of mortgage payments made during the first three years of a 30-year mortgage go to interest.

Preferential homeowner treatment
In addition to helping buyers pay down principal more quickly, this innovative new mortgage does not require a credit score or down payment, according to American Banker.

BOA subsidies, seller concessions and the money buyers would normally use for down payments help buy down the interest rate to as little as 1.25 percent, the media outlet reported. The subsidy provided by the major lender will result in a 1 percent buy down lowering the interest rate by 0.5 percent, whereas such a buy down would usually cause a 0.25 percent drop.

Product characteristics
To create this innovative product, Pinto collaborated with Stephen Oliner, resident scholar at AEI.

The innovative new mortgage allows participants the opportunity to own their home free and clear in 15 years. It carries less risk than a more traditional 30-year loan, and permits the buyer to build equity more quickly.

The WHBL currently delivers more than 90 percent of 30-year FHA-backed loan's buying power. Four key factors combine to create this scenario:

1) The product carries less annual credit risk expense

2) The conventional rate of the 15-year loan is 0.75 less than the FHA's 30-year rate

3) A modestly higher housing debt-to-income ratio is possible because of the strong savings feature

4) The product benefits from a 1.25 percent permanent rate buy down, which can be created by repurposing the 5 percent in down payment funds. This is made possible by the product's maximum loan-to-value ratio of 100 percent.

Pilot program
The AEI announced that Bank of America and NACA would be responsible for the first rollout of these products. BOA indicated it would originate the loans, subsidize the interest rate buy down and hold the mortgages on its balance sheet, according to American Banker.

In addition to disclosing plans surrounding the pilot, the AEI revealed the NACA had plans to adopt the WBHL in all of its nearly 40 offices. The community advocate plans to create more rollouts of these wealth-building loans, including ones designed for middle-class borrowers.

A new approach to housing policy
The AEI emphasized that U.S. housing policy has steadily lowered lending standards in an effort to bolster homeownership. These efforts were directed at those in low - and moderate-income buyers in particular.

The think tank asserted that these attempts have not succeeded. The nonprofit cited figures indicating that while homeownership did increase between 1940 and 1960 - rising to 61.9 percent from 43.6 percent - it has failed to enjoy significant improvements since then. Currently, the rate stands at 64.7 percent, and is moving lower.

The think tank went on to note that the value of homes - and in particular low cost properties - can fluctuate significantly. Therefore, AEI asserted that WHBL is a good way for homeowners to build equity and also protect their investment.

Industry consensus
It is worth noting that while Pinto and Marks frequently have diverging views, they both agree when it comes to the homeownership challenges low-income borrowers face, American Banker reported.

Marks stated that in many cases, he would think of Pinto as being an opponent, according to the news source. However, the two began discussing methods to make homeownership more affordable - and less risky - for low-income Americans after speaking together on an industry panel.

Potential buyers should keep in mind that while the debt-to-income ratios for most loans cannot surpass 43 percent, NACA mortgages usually cannot exceed 41 percent, the media outlet reported. In addition, borrowers should know they will need some form of down payment ready to get a mortgage with an interest rate of between 1 and 2 percent.