During the last decade, the number of loan products and programs has increased significantly, with some aimed at “mainstream” (conforming) borrowers and others developed specifically for niche markets.
While many originators strive to narrow their product offering to a manageable number, others are constantly looking for the latest and “best” product that will meet their clients’ needs and help the LOs stand apart from their competition.
All originators have their favorite loan products; following are highlights of a few of the most popular.
No Payment for First Year
Certainly one of the most innovative loan products available is the “no payments for first year” program that Rick Jones, president of Cal Pacific Mortgage in San Diego, Calif., recently introduced and which so far is exclusive to his market. Jones determined that borrowers would welcome this type of product, and after extensive discussions and legal review with one of his major banks, unveiled the program late last year. “It enables borrowers to put off making payments for the entire first year and then resume payments on the 13th month,” he said.
The program involves the seller providing the buyer with a credit for up to 12 months of payments instead of lowering their (seller’s) sales price. At the close of escrow, the homebuyer receives the credit in cash to be put toward the first 12 months of payments. Credit is allowed for the first mortgage up to 80 percent loan-to-value. (The buyer pays the taxes and insurance and second mortgage, if applicable.) The buyer’s regular monthly payments will be slightly higher than if they hadn’t taken the “no payment for a year” loan.
Since its introduction, Jones said that the program has become popular with his Realtor and builder clients (and others) who find it is especially appealing to first-timer borrowers. “The initial savings can allow borrowers to remodel, buy furniture and/or save a little extra. Of course, it’s a great way for Realtors and builders to market properties to interested borrowers,” he said. Jones added that he relies on word-of-mouth referrals to generate visibility for the product.
Jones noted that this type of program requires extensive upfront evaluation and legal review, but can be worth the investment. “It’s been good for us,” he said. “We’ve had a great response and handled a number of these loans so far, although other lenders are starting to test similar programs. This is an example of meeting a specific borrower need that also has helped distinguish us in the marketplace. Originators and lenders have to figure out different ways to do business in today’s competitive arena. Think outside the box and come up with a creative approach.”
Some originators have complained that Home Equity Lines of Credit (HELOCs) don’t provide much incentive—the fees have been on the low side and banks offer stiff competition in order to hold on to one of their mainstay products. Others see HELOCs as a “necessary evil” that are important to offer existing and new customers. Pattie Romanzi, president of Par East Mortgage, East Hampton, N.Y., has watched her HELOC business expand during the last couple of years. She said that the typical origination fee was in the $500 to $750 range, and she considered the HELOC an “accommodation” to customers rather than a profit maker; thus most LOs weren’t especially interested in handling them. “However, as banks began paying us better fees (an average of $1,250), we were finally able to give originators a few extra dollars as an incentive to do them,” she said.
Romanzi said that in some cases, customers have found banks to be a cheaper source for HELOCs, “although in others they’ve been more expensive for the customer.” She emphasized that her primary goal is to offer them so that borrowers won’t go elsewhere. “Customers will remember you later on when they need another loan,” she said. “This (HELOC) helps to ensure their loyalty; we don’t want them going to the local bank in the future.”
Robert Moulton agrees that HELOCs are worth doing, although he’s even less concerned about making money on them. “I consider them to be a loss leader,” said Moulton, president of Americana Mortgage Group, Manhasset, N.Y. “You can’t make money on every loan. I’ll do HELOCs as a standalone deal or as a piggyback, as a service to current, past and new customers.”
Moulton doesn’t charge customers a fee for doing HELOCs and said lenders provide a “stipend” of approximately $500 for each loan. “It’s a no closing cost loan for us,” he said. “But the customer will remember the place they got their last loan, and once I do it, I’ve got the client’s information in my database. I’ll send them newsletters, postcards and other contacts from then on.”
In the past, Moulton has marketed HELOCs with a postcard that advised customers to “Tap into Your Equity.” He added that the timing for such direct mail pieces is critical. “I did that three years ago when the HELOC rates were attractive at four percent, now they’re at eight percent and not as appealing.”
ALT-A programs have given lenders and originators more leeway in serving borrowers who may be on the fringes of A-paper. Sharla Ellis, vice president/originator at Chase Home Finance, Salt Lake City, Utah, considers them ideal “for borrowers who don’t quite fit A-paper but aren’t subprime. These are full, stated or no doc programs on either interest-only, fixed, or fully amortizing ARMs,” she said. “The stated or reduced doc or no doc programs have provided for the ‘void’ that existed between A and subprime.” Ellis suggested that originators explore the potential that Alt A programs offer. “My best advice would be for originators to read the policy or product guidelines so they know these programs exist and also know the ins and outs to them. I’m not sure everyone knows how great these ALT-A programs are and how they can help borrowers who need to fit into a round peg with a square hole.”
Bradley King, vice president at Wachovia Mortgage, Jacksonville, Fla., also has seen ALT-A products become more popular during the last couple of years. He said his ALT-A customers possess slightly lower credit scores or have stated income/asset or employment issues. “The loan typically involves a different combination of add-ons, a bump in rates and points,” he explained. “The last couple of years, many lenders were seeing how they would evolve—rolling them out as they performed (well), then becoming more aggressive. This year, with the overall mortgage market contracting, they’ve been more aggressive with this product to create volume.”
For customers inclined to reduce their mortgage faster, a bi-weekly payment plan might be just the answer. Essentially, they will be making payments every two weeks rather than on a monthly basis. For example, by authorizing the lender to deduct a half of one regular payment bi-weekly, they will hasten their home’s equity growth while reducing the time it takes to pay the loan in full. Certain lenders have formal bi-weekly payment programs and in other cases the borrower can do it on his/her own by making a regular monthly payment, in addition to including a second payment equal to 1/12 of one payment.
“I am a big fan of the bi-weekly payment concept,” said Ellis whose company offers a special program. “I don’t think people realize how easy it is or can be to add a little extra money on a regular basis and then watch years and interest come off their mortgage. As an originator, I like to add value and this is one way that I do it, discussing this concept and helping my borrowers build wealth through mortgage management.”
Rajeev Rajpal, an originator with Wells Fargo Home Mortgage, Staten Island, N.Y., concurred that the bi-weekly program provides customers with a special option. “Many customers are more comfortable with this type of payment because it fits their own pay schedule,” he said. “They realize that by making one additional payment a year, they could be knocking off up to 7 ½ years of their mortgage term.”
Rajpal noted that even though the bi-weekly mortgage isn’t appropriate for all borrowers, originators should present it as an option. “It’s a good selling point and offers them some good benefits that should be explained.”
A Jumbo Offering
Resort communities, second home markets and many other higher-priced markets are all prime locales for jumbo originating, which currently falls in the $417,000 to $650,000 range (with super jumbos to $1 million plus). While he has a mix of customer types, King has developed a special niche of second home and investment customers in several Florida communities. Of course, these aren’t the “average” buyers. “We’re seeing more investors and second home purchases by foreign nationals, someone who resides in another country, and is here as a temporary visitor on visa,” said King. “Lately the 7/1 ARM (amortizing) has been the most popular jumbo product.”
King noted that a majority of his business is in construction and lot financing, at a higher dollar volume. He doesn’t do much marketing; but prefers direct contact with his “high-end” referral sources. “I cultivate referral sources and they know that I have the expertise and with a company has breadth of services to offer a range of products. I’m targeting the Realtor or developer who does that price point.”
Mark Klein, an LO at Pacific Coast Lending, Agoura Hills, Calif., is a jumbo originator by choice—having selected that as his desired base when he began originating expensive Southern California region. “From day one, we went after the bigger loans and my most logical focus was CPA and financial planner clients,” he said. “To make more money, you need to go to the right referral sources. Our average loan size is about half a million dollars.” He added that the majority of his jumbo clients are self-employed.
Klein noted that to excel in the jumbo arena, originators should be well versed in the stated income category. “You need to know the investor guidelines and be familiar with the nuances of credit scores, liquid assets/reserves and LTV. “The most common product is the five-year fixed, interest-only, it’s generally some form of hybrid fixed/interest-only loan. Self-employed are generally interested in cash flow. We rarely do a 30-fixed product for jumbo borrowers.”
Despite the criticism of interest-only and other nontraditional mortgages, Moulton is a believer. “I think they’re still a good program, especially if the customer is getting bonuses or a commission (enabling them to handle the eventual additional payments),” he said. Moulton said his ideal I/O customer is one who is able to prepay a portion of the principal on some regular basis, so that he isn’t caught short when the five, seven, or 10-year term is up. “I don’t think this loan is for everyone,” he said. “For instance, it’s not right for someone with a fixed monthly income who wouldn’t be able to deal with the increase. However, someone with a commission or bonus situation can pay an extra amount (toward principal) at the end of the month, which will reduce their amount the following month.”
Ellis offers customers the more basic interest-only programs, for example, those that are fixed for five, seven and 10 years with no negative amortization or COFI ARMs. “I deal a lot in the high-end and my borrowers are dazzled by the automatic recasting of the interest-only after they chunk down the principal.” She agrees that it’s not necessarily suited for beginners. “I would not really consider the interest-only for a first-time homebuyer. I like to think of it as a sophisticated program that is not best suited for everyone, but is safe and sound for those who can handle it, perhaps those who will see appreciation and will make money on the appreciation, rather than the small amount going to principal each month.”
FHA lending may seem too involved for some LOs, but it’s a major portion of Linda Davidson’s business, primarily because of her market. “Being in an area where the average sales price is $120,000, FHA makes a lot of sense to our buyers,” said Davidson, senior loan officer/underwriter at Service First Mortgage, Garland, Texas. “The most beneficial part of FHA is that we have the ability to underwrite using common sense versus having to use an AUS system. This allows us to give the buyer a market rate rather than taking them to a subprime market.”
Davidson noted that most of her buyers use a first-time homebuyer program to purchase. “The majority use the FHA 203b loan (normal FHA loan), but the 203k loan (home improvement wrapped into an FHA loan) has become more popular due to the new and improved changes in the guidelines,” she said. “We have also had the opportunity to use the FHA 203h program which is for buyers coming from an area that has been deemed as a federal disaster area (hurricane victims,) which gives them the ability to purchase without a down payment.”
Davidson has used a variety of strategies to market her FHA expertise. “For example, we participate in all of the first-time homebuyer programs in the area, market local builders whose houses are in the FHA price range, run an ad in the local real estate book (with a call-capture system) and teach classes to our Realtors on how to differentiate their listings from others in the neighborhood (advertising a $999 move in).”
Clearly this is just a sampling of the today’s varied residential loan menu. However, these originators have underscored the importance of adapting new and used programs to meet their clients’ diverse needs and generate name recognition in a crowded marketplace.
By David Robinson
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