Magazine article Mortgage Banking

90s in the Nineties

Magazine article Mortgage Banking

90s in the Nineties

Article excerpt

90s in the Nineties

The 1980s brought a flurry of activity in the mortgage banking industry. Many aspects of the mortgage finance environment are still rapidly changing. Tucked away and sometimes overlooked amidst this changing environment are a multitude of opportunities for growth and profit. Among the most promising of these opportunities are low down payment, high-loan-to-value (LTV) loans.

Changing demographics across the country have prompted the mortgage banking industry to create products that meet its customers' new needs. When the first baby boomers began purchasing homes in the 1960s and 1970s, their goal was to build equity and pay off the house as quickly as possible.

In today's markets, the focus cannot be quite so narrow. In fact, paying off the mortgage quickly may not be the best choice for the homeowner or the most profitable option for the lender. Many customers are changing their lifestyles and want access to the equity they've built up since they took out their initial home loan 10,20, or even 30 years ago. First-time homebuyers will remain a good, strong market in the 1990s, but there are other potentially strong market segments that could be tapped for high LTV loans.

In the 1990s, market segmentation will help lenders analyze the needs of first-time homebuyers, move-up buyers and empty nesters. High-LTV loans are becoming a more attractive and more profitable option for these groups. Also, the additional servicing income from the high-LTV loans is good for the lender's bottom line.

The tax deductions are especially appealing for move-up buyers and empty nesters since Congress passed the tax laws removing other consumer interest deductions. Simply put, the new tax laws eliminate interest deductions for all debt after 1990 with one exception - the mortgage loan. Owning a home and purchasing it with a low down payment loan can maximize tax deductible interest, increase homebuyer savings and provide the best tax shelter for most Americans. The loans also can provide cash to help customers pay off outstanding consumer loans. It also makes a lot of sense to lend to borrowers with an established record of payments and a steady income.

For example, consider the Ryan family. Jim and Dinah Ryan need a larger home now that their family is growing. They have $25,000 in equity build-up from the home they are in and $5,000 in cash available for the down payment. The Ryans also owe $10,000 on their car.

By purchasing a $150,000 home with a low down payment loan, the Ryans can benefit from the interest deductions on their taxes and add money to their savings every month. While they could put down $30,000 (a 20 percent down payment) and keep the $10,000 car loan, they would be better served with a high-LTV loan. Instead, they can put down 10 percent of the purchase price of the house ($15,000), pay off their car debt ($10,000) plus have $5,000 in cash to invest elsewhere or leave in savings.

By using the low down payment loan, the Ryans maximize their tax deductible mortgage interest and eliminate their non-tax deductible consumer interest. Although they increase their monthly mortgage payments, they decrease their total monthly debt payments. The lender also benefits from safely increasing the origination fee and growing the servicing portfolio with no increase in work.

With a low down payment, the loan may be as much as 20 percent larger, which means the servicing revenues and origination fees increase accordingly. Also, the default risk is equal, if not better, because the borrower retains the cash reserves and will be more likely to maintain an established payment record. Private mortgage insurance also can help manage high-LTV risk.

These discretionary buyers often choose to put down a minimum down payment because it gives them more 100 percent tax deductible mortgage interest, especially in top tax brackets. Housing appreciation is forecast to be about 2 percent to 4 percent a year in the 1990s, and a larger down payment will not significantly increase the homeowner's return on their investment. …

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