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Fallbrook, Bonsall, Rainbow, De Luz, Temecula Valley & North San Diego County Real Estate
LA Times - October 5, 2014
BY LEW SICHELMAN
THE WEALTH BUILDING HOME LOAN IS A 15-YEAR MORTGAGE WITH A FIXED INTEREST RATE THAT CAN BE BOUGHT DOWN TO ZERO.
Two major banks have agreed to originate a new 15-year mortgage under
pilot programs aimed at low- and moderate-income borrowers.
In addition, the creators of the so-called Wealth Building Home Loan,
which allows home buyers to build equity at a much faster clip than they
would with a standard 30-year loan, are planning to bring their ideas
to 10 other institutions over the next few weeks.
Still, Edward Pinto thinks it might take months or even years for the
product to become universal, if it becomes a regular offering at all.
But Pinto and his co-conspirator, Bruce Marks, generated major buzz when
they introduced the Wealth Building Home Loan at a mortgage conference
in North Carolina in early September.
The loan won the endorsement of several high-profile industry
executives, including Lewis Ranieri, generally considered the father of
the mortgage-backed security, and Joseph Smith, the former North
Carolina bank regulator who was appointed to oversee the National
Mortgage Settlement that created new mortgage servicing standards and
provided some relief for distressed owners.
So what is everybody so excited about?
The Wealth Building Home Loan is a 15-year mortgage with a fixed
interest rate that can be bought down to zero. In addition, little or no
down payment is required, there are no additional fees, and
underwriters will pay far more attention to your residual income than to
your credit score.
Typically, the monthly payment on a 15-year loan is higher than that on a
30-year loan. But the loan amortizes much more quickly, meaning you
build wealth — or equity — faster.
To make the payments more affordable, the offering rate will be about
three-quarters of a percentage point below the 30-year FHA rate. And the
rate can be bought down even further. For every 1% of the loan amount
the borrower puts up as a down payment, the interest rate will be
lowered by half a percentage point, which is twice as much as usual.
Consequently, a $6,000 down payment on a $100,000 mortgage at 3% would
bring the rate down to zero, meaning that every penny spent on the
monthly payment would go to principal.
But here's the key: Underwriters will want to make sure you have enough
money left over after you make your house payment to cover all your
other monthly expenses. That way, should you have a financial setback,
there will be enough money coming in that you can still make your
payments and won't fall into foreclosure.
Pinto and Marks are strange bedfellows. Pinto is a conservative gadfly
who is a thorn in the side of the conventional mortgage market, while
Marks is a liberal consumer advocate who thinks nothing of gathering his
followers to picket the homes of banking executives to persuade them to
do more for low-income borrowers.
But while on an industry panel together in May, Pinto, a resident fellow
at the American Enterprise Institute, and Marks, who heads the
Neighborhood Assistance Corp. of America, had a "meeting of the minds."
They decided to work together to create a vehicle that would help low-
and moderate-income borrowers build wealth rather than just accumulate
In a sense, the result is a throwback to the long-forgotten early years of the Federal Housing Administration.
its first 20 years or so, the FHA insured mostly shorter-term, 15- to
25-year mortgages and required 20% down payments, a full review of a
borrower's household budget and rigorous appraisal standards.
But the beginning in the late 1950s, U.S. housing policy shifted, and
lenders started to rely on ever-looser underwriting standards. The
result: Low-and moderate-income borrowers are pushed into
overwhelmingly high-risk loans. If something should go wrong in the
borrower's life - job loss, major illness, divorce - there is little for
him or her to fall back on.
In the first three years of the Wealth Building Home Loan, 77% of the
monthly payments go to paying off the loan's principal, whereas 68% of
the payments of a standard 30-year mortgage are interest to the lender,
And after 15 years, you own the home free and clear. And starting in
year 16, there is no longer a house payment at all, so you have extra
cash flow for life-cycle needs such as your children's education. With a
30-year loan, on the other hand, you could be making payments well into
"This is an opportunity to spend a little more each month but build
wealth much more rapidly," Pinto said. "But even better, there is only a
small probability of going into foreclosure. If house prices should go
down, you're covered because you have some equity to fall back on."
Initially, the Wealth Building Home Loan will be made available
through NACA's 37 offices. NACA acts as mortgage originator for Bank of
America under a $10-billion contract. NACA is also talking to other
lenders about starting pilot programs for their own employees and to
meet their community reinvestment requirements.
The Wealth Building Home Loan could be a good option for some, but
there's still nothing wrong with a longer-term mortgage. In any case,
homeownership can be a wonderful way to build wealth. According to the
latest Federal Reserve Survey of Consumer Finances, an owner's net worth
is 36 times greater than that of a renter. The survey found that the
average owner's net worth is $194,500, whereas a renter's is $5,400.
[Distributed by Universal Uclick for United Feature Syndicate]