CREATIVE MORTGAGE PLANS UNDER DEVELOPMENT September, 2002 By Jim Woodard There are some creative new mortgage programs on the drawing boards. They provide special benefits to borrowers never before offered. For example, one program being developed by Fannie Mae (the nation’s largest buyer of existing home mortgages) would include basic home warranty coverage as an integral part of the mortgage package. The warranty would cover all major mechanical systems in the home. It would be set up as a “preferred provider” program, meaning the consumer-borrower could choose the contractor of their choice, as long as the contractor is listed by Fannie Mae as one who is authorized to participate in the program. The price of such a mortgage has not yet been determined. Another plan, also being developed by Fannie Mae, would protect the borrower against unexpected interruption of income such as a job loss or other emergency that could stifle the consumer’s income flow. Several mortgage plans are now being developed that would offer protection against major household financial problems. One such plan would provide up to six month’s worth of mortgage payments when borrower encounters financial disasters. The cost of such a mortgage and the precise type of insurance add-on that will be required is still under study. These and other new mortgage concepts will probably be ready for implementation by early next years, according to a Fannie Mae spokesperson. Freddie Mac, Fannie Mae’s biggest competitor, is also working on new mortgage programs with warranty coverage and other new insurance-type benefits. As the mortgage market heats up, so too does competition among lenders to come up with innovative new plans that will be popular and salable to prospective borrowers. The pressure is on. And that can only result in unprecedented benefits to mortgage borrowers. * * * Some homebuyers try to save money by trying to go around the real estate broker who introduced the home to them and deal directly with the owner. This also applies to mortgage brokers. Trying to bypass the broker in a purchase transaction is a bad idea, and is often counter-productive for the buyer. Real estate brokers usually spend a huge amount of time with each prospective buyer, giving them the benefit of their knowledge and experience. Going around them and making an offer directly to the owner in an attempt to save the commission can open the door to major legal hassles. The legal costs and frustrations aren’t worth the risk. And it’s just outright dishonest. In the case of mortgage brokers, some buyers also obtain valuable information from these professionals, then go directly to the banker-lender (source of funds) to apply for the loan, thinking that will result in a better deal for them. The borrower probably wouldn’t save anything by going directly to the mortgage banker-lender. He would pay the same retail rate for the mortgage whether processed through the broker or banker. In most cases, the borrower will get the most beneficial deal by continually working with a broker. Again, the mortgage broker normally provides much needed professional advice and information to the borrower before a mortgage plan is selected. He can choose from many varying packages offered by different lenders. The broker definitely earns his fee, paid by the selected banker-lender. * * * There’s been a lot of press in recent weeks about the rising cost of “private mortgage insurance” coverage. These premiums are high and should be avoided when possible. Private mortgage insurance (PMI) is usually required by mortgage lenders when the loan is more than 80 percent of the property’s value. The cost of this coverage was recently increased by 11 to 69 percent for subprime borrowers – those with poor or marginal credit histories. Let’s look at it from the insurer’s viewpoint for a moment: The increased rates are only for persons with low credit scores (FICO scores), but still over 575, according to Geoffrey Cooper, director of public policy for MGIC Investment Corporation, the nation’s largest private mortgage insurer. But in some cases, coverage is now for the first time offered to subprime borrowers with credit scores of less than 574. The reason for the rate increases is to charge premiums that are more commensurate with the actual risk of claims, Cooper pointed out. It’s in the interest of sound business practice. The increased rates points up an important bit of advice for home buyers. If possible, make at least a 20 percent cash down payment of the home you buy, so this type of insurance isn’t needed. And do whatever is necessary to improve your credit history and record. This can save you thousands of dollars in mortgage payments over a few years. “Our hope is that more borrowers will take the time and effort to repair bad credit before buying a home,” Cooper said. “Doing this will save them a lot of money and will result in them getting the lowest and most manageable monthly payment possible.” * * * A proposal is now circulating in national legislative circles to make residential inspections mandatory in federal home loan programs. Several legislators are convinced that making inspections mandatory would provide needed protection for consumers, particularly those in minority and low-income categories. Also, an effort is now underway to study the scope of consumer knowledge about FHA-financed independent inspections currently available under the U.S. Department of Housing and Urban Development’s (HUD’s) Homebuyer Protection Plan. A special focus would be directed to consumer education regarding differences between appraisals and inspections. Many people seem to be confused by these two very different functions. | 
