The often unintended, adverse consequence of the subprime product crisis is the lender’s tendency to use caution when introducing new and affordable loan programs that are not “plain vanilla.” Agreed, the era of “exotic” mortgages is gone. Yet, going forward, the hope is that instead of reducing mortgage choices, the industry will come up with well structured creative options. The Dodd-Frank legislation is one expression of that understandable push to apply loan risk retention rules that will make sure high-quality risk management practices are achieved throughout the mortgage lending process. However, in some cases loan options have been quickly withdrawn following a “better safe than sorry” approach.
Case in point is an interesting zero interest loan offered by Community Clearinghouse Agency Inc., Lancaster, Pa., for first-time homebuyers. Its creator, Dale Vega, the agency’s director, told NMN that he put a lot of thought and efforts—almost six months to be exact—into developing his idea. “I wanted to help,” he said, during these difficult times when demand for affordable housing may not make the headlines but is a necessity. Community Clearinghouse is a volunteer nonprofit in operation since 1995. Vega said the rent-to-own option was structured to allow borrowers to make payments that would be directly implemented towards reducing the principal—since it is a zero interest loan. It was designed “to help the economy by buying and selling single homes” prospective buyers can own “free and clear” within 12 to 14 years if they can afford to pay a little extra towards their principal payments.
Financing would be based on the buyer’s ability to pay “not necessarily the credit score” but they would be expected to provide a reasonable down payment and closing costs. The loan would be funded by federal grants and sponsors in Pennsylvania and eventually in other states except for a few states such as Nevada, which may not be the best state to purchase foreclosures because it is the nation’s top foreclosure state where home values are still fragile.
The program would be used to purchase lower-end properties. For a loan at about $150,000 the monthly mortgage payment that includes $62 in insurance, $150 in taxes and a $100 monthly administrative fee would be no higher than $1,200. Since the total amount of taxes, insurance and administrative fee is $312 the remaining $888 is applied to the mortgage. The same formula would apply for both regular sales and foreclosures.
Asked whether it is too good to be true, Vega said it certainly is not the case. It is a great option for first time buyers, he added, not a scam. Vega maintains that even though it is a financially sound solution, probably because nowadays borrowers tend to be more skeptical, there were very few buyer inquiries about the loan. So merely one month after its launch in November he decided to pull the product out of the market. Vega said he feels misunderstood and sad that his heartfelt effort to assist those in need did not take off as he expected. Was Vega too quick to pull the plug on a product that at least on paper had a lot of potential? Did potential homebuyers miss out because the nonprofit got “cold feet” or because they limited their marketing efforts to one PRNewswire press release? Maybe. Other organizations have retrieved their programs shortly after their introduction, or may continue to offer a product they would not advertise through the media.
Mesa Law Group of Costa Mesa, Calif., a law firm specialized in financial services, discontinued its Home Owner Mortgage Restructuring program shortly after its launch.
HOMR was created “to offer clients a principal reduction option” through a lien elimination solution from Investors Finance Inc. but turned out to be “insufficient in the face of market conditions and legal responsibilities.” The firm reported HOMR could not “overcome the complexity” that many principal reduction programs face, including the length of term, resistance from lenders, and the fact that “IFI’s finance structuring could not stand up against” the Truth in Lending Act and Real Estate Settlement Procedures Act requirements.
In the New York area, Amalgamated Bank started offering its Communities of Change program in December for low- to moderate-income New York residents. Qualifying requirements on the 30-year or longer fixed-rate mortgage loan include a 97% loan-to-value and mandatory counseling that is provided by MHANY, a Brooklyn-based financial counseling agency that takes pride in its almost zero borrower/homebuyer default rate. A MHANY spokesperson told NMN the program has potential for long-term success, but bank executives changed their mind and would not talk on the record about the specifics of the loan, at least for now.
Others are more optimistic about their unique products. In the fall of 2010 Loans4Love of Newport Beach, Calif., entered into a strategic partnership with After-School All-Stars, an after-school program designed to help at-risk youth. The partnership—which is still alive and well—would rely on a unique Loans4Love program that blends “the art of lending” with “the heart of giving.”
In the words of Loans4Love founder and CEO David Ludington, the program enables prospective homeowners to choose to purchase a new home or refinance with Loans4Love so that 25% of the home loan origination fee is donated to a cause that is near and dear to the borrower’s heart. It can be the After-School All-Stars, which engages about 80,000 underserved children annually in 13 cities across the country, or another nonprofit. Partners include Touchdown vs. Shutdown and Hoop Heroes created by NFL and NBA players who pledge to make donations to such nonprofits based on their performance statistics.
Loans4Love and its consortium of national-/state-chartered FDIC banks are engaged in generating support for nonprofits through competitive direct lending and unique loan solutions while employing loan officers whose compensation is not based on loan commissions. Loans4Love describes itself as an innovative and progressive mortgage bank whose mission is to create a referral network that aims to connect socially responsible borrowers with local, like-minded, bankers interested in donating “a substantial amount of their commission to nonprofit organizations.”
