Mortgage & Loans
How do banks need to position their mortgage products differently as we anticipate a shift back to a purchase environment from a refinance environment?
I think banks are taking the right approach with the relationship banking strategy. Offering preferred pricing, discounts, rewards, and benefits on other products – things like free checking, no monthly minimum balances, etc – are benefits that appeal to consumers. Banks should also stress the benefits and positive nature of the existing relationship, and how that will extend to the servicing of the loan.
You shared a number of different mails. Do you ask your panelists which type of mailer they are most likely to respond to? One with a chart with options vs. bullet point benefits?
We haven’t asked our panelists which format they would most likely to respond to. Most likely, a better way to track this is to test both formats because it would result in the true response, which can be different from an “intended” response.
When mortgage rates go up, how will it impact HELOC demand? I presume homeowners will rely on less cash-out refi and turn to HELOC – any insights or stats?
Most likely HELOC demand will go up. Two things would prompt this: 1) By then almost everyone who was able to refinance would have done so; and 2) the rates on HELOCs will be lower than on mortgages.
Are you seeing a trend that people are getting a HE line of credit instead of using their credit cards because the HE line of credit rate is a lot lower and has the tax benefits?
In general, if a consumer qualifies for a home equity product, they’ll use that over a credit card to fund large purchases that will be paid off over time. The big benefits are lower rates and tax benefits. The exceptions to that might be people who have the resources to use their credit card, but pay the balance off quickly, mainly because they want to earn rewards or points.
How frequently are you seeing home equity offers for educational loans? Have you seen this decline with the new disclosure regulations with Title X for student loans?
We often see home equity products promoted as a way to pay for “anything” including “home improvements, college tuition, buying a car, emergency use, and more.” I think this is because the loan is taken out by the parents, not the student, and it’s up to the parents how they wish to use the money.
I’ve been reading quite a bit about Harp 2.0 , are you seeing much activity in this space?
Yes, we are seeing quite a bit of activity around HARP. We see many offers that outline the specifics of the program. Some offers state, “You are eligible for HARP if you meet all of the following criteria” which is followed by a list of bullet points. Other offers state, “Concerned you can’t qualify?” and then specifically mention HARP, but don’t go into the qualification details.
A lot of the examples you’ve shown are from mid- to bigger banks, do you see community banks employing the same tactics?
Yes, we’re seeing a cross-sell and relationship banking strategy across the board. To some degree, smaller banks may be focusing more on acquisition, mainly because they don’t have the huge customer base that larger banks have. This forces them to focus on acquisition. But having said that, the smaller banks are still trying to cross-sell existing customers on a variety of products, including loans.
There was a direct mail loan example that had an incentive as part of the offer. Incentives are common in deposit products, but how are they being used with loans? Are they common?
Incentives are the norm for deposit products, but they’re not nearly as common on loan offers – roughly 10% of the loan offers have an incentive. Most commonly, the incentive is in the form of a rate discount or cash back at the loan signing or for bundled packages. BBVA Compass marketed mortgages with checking and credit card accounts, and offered a $500 credit. PNC offered a $50 cash incentive to customers who could turn in all paperwork within 3 days of submitting the loan application. Some lenders offered gift cards or even iPads.
What are banks doing to encourage automatic payments of loans?
Banks are offering rate reductions if the customer does automatic payments for the loan from a checking account at the bank. They’re also mailing offers that are only good if the customer selects automatic payment.
What is a reverse mortgage? A reverse mortgage is a unique loan that enables homeowners to convert a portion of the equity in their homes into tax-free cash without having to sell the home, give up title, or take on a new monthly mortgage payment. If you are a homeowner age 62 or older and have paid off your mortgage or have only a small mortgage balance remaining, and are currently living in the home, you are eligible to participate in Federal Housing Administration’s (FHA’s) reverse mortgage program. The FHA is a branch of the U.S. Department of Housing and Urban Development, (HUD). The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM), and is available through an FHA approved lender.
Since 1990, there have been nearly 700,000 HECM loans created, (Source: HUD). As you would expect the three highest annual totals were between 2007-2009. That time period, of course, was when the U.S. economy experienced its worst economic contraction since the early 1980’s with unemployment reaching double digits. Individuals were distressed, in need of relief and reverse mortgages may have helped a lot of seniors in dire times. In my eyes, it’s an excellent financial tool to help seniors stay in their home, and increase their standard of living. It’s a shame not everyone is so complementary of reverse mortgages. Like anything else, it has its fair share of both advocates and critics…
The biggest negative of reverse mortgages is high closing costs. The senior must pay origination fees that are about double what they are for conventional mortgages and mortgage insurance. And the interest rates are adjustable, (which means rates can be raised at periodic intervals according to the prevailing interest rates in the market). Another potential negative to think about is, what about seniors who depend on Medicaid or other state or federal programs? It’s important to consider if reverse mortgage payments will affect their eligibility…
How do reverse mortgages come to an end? Reverse mortgages come to an end in one of three ways. You can elect to pay it back; you can sell your home and pay it off; or when you die, the home is sold and the loan is paid off. Unlike conventional loans, you don’t owe anything until you die or sell the home. As with conventional loans there are fees and interest expenses which must be paid and which typically are rolled into the amount you receive.
Now, here is the $64 question: How do the adult children of these seniors feel about reverse mortgages? Some like it and feel it’s helped their parents live a fuller life in their retirement years. Of course, some don’t and feel like the equity in their parents’ home is their money. I jumped on a number of chats & forums in order to obtain some actual Voice of the Customer (VOC) on this very subject. And here are some of the things that were said:
- “I don’t like the idea, individually. There are other ways to get additional income minus giving the family house to a bank.”
- “I think it’s a good concept and families just thinking about them should pay a lawyer a few hundred bucks to just review the language.”
- “I would be vastly upset if my parents did this. They aren’t poor by any means, and I don’t want them to be spending up “my” inheritance on themselves.”
- “My parents reverse mortgage gave them the ability to continue living independently in their own home, which made my husband and I very pleased.”
My parents worked their entire lives to ensure that we had clothes on our back, food on our plates and a roof over our heads. Personally, I think that if my mom & step-dad want to use a reverse mortgage to help them out instead of leaving their home to us kids, I’m all for it and will even help with the set-up and closing costs. They deserve to use their money/funds however they choose. They’ve definitely earned the right!
Thanks & please let me know your thoughts or comments…
Just when you thought the light at the end of the economic tunnel was beginning to shine, The Chicago Tribune identified another symptom of the mortgage bubble and a weakened economy: bank walkaways.
Personally, I’ll admit that I had never heard that term before. It’s easy enough to discern the meaning, but just in case you haven’t had your coffee yet: a bank walkaway occurs when a mortgage servicer abandons the foreclosure process. This usually happens when the bank determines they will not recoup the cost of foreclosure, in addition to maintaining and marketing the property after the process. They can literally, walk away. While this may help companies keep bad debt off the books, it’s creating another problem – a surplus of abandoned properties.
Abandoned properties are a sign that our economic troubles are still alive and kicking. And it may get worse before it gets better. Rick Sharga with RealityTrac Inc predicts that 2011 will be a peak year for foreclosures, estimating over a million homes will be repossessed by lenders. Readers, my beloved home state of Illinois is ninth on the top ten list of states with the highest foreclosure rates. Considering that Chicago is the most densely populated city in the state – my neighbors are in trouble.
When banks walk away, it’s not always clear who is responsible for the upkeep and security of a vacant property. Sometimes, even the city needs to step in and demolish homes if they’ve fallen into complete disrepair. Then it becomes the taxpayer’s responsibility.
And yet, it’s not all doom and gloom. The forecast is still cloudy with a chance of foreclosure, but some lenders, Wells Fargo and Bank of America in particular, are working with the city on how to best to deal with abandoned properties. It’s in everyone’s best interest to keep current on their mortgage, but when that just can’t happen, banks shouldn’t be abandoning the neighborhoods either.
Readers, would you be more likely to procure a mortgage with a lender with a demonstrated commitment to the city and neighborhood in which you live?
A recent article in the Mortgage & Loan sector on Comperemedia’s website found that jumbo mortgage lending is making a comeback. I recently found another article on CNNMoney.com reporting on the comeback of adjustable rate mortgages (ARMs). Aren’t these the lending products that caused our economy to tank? In fact, according to CNNMoney, 70% of all mortgages issued during the so called real estate “bubble” were ARMs. By 2009, after that bubble burst, ARMs dropped to only 3% of the market. Now, ARMs make up closer to 5% of the market and Freddie Mac is predicting as high as 10% by December. Going through the home-buying process right now myself, I can honestly say I was slightly afraid of these unpredictable ARMs. But, I was curious nonetheless, and I found some legitimate reasons why these scary sounding products are slowly making a comeback.
The general fear about a mortgage rate that can fluctuate is the unpredictability. One of the biggest causes of the credit crisis was the sudden increase in rates which resulted in monthly mortgage payments that homeowners could no longer afford, so I understand the lingering doubts that current buyers may have. With a little bit of research, I’m starting to understand why these products can actually be a money-saving option. Currently, a 30-year fixed rate mortgage is hovering around 5%, which will stay constant for the life of the loan, resulting in consistent and predictable monthly payments. An ARM, on the other hand, can offer a lower rate for a limited period of time, after which it can vary according to the market rate. The most common ARM loan on the market today is the 5/1 ARM, which means that the initial interest rate applies for the first five years of the loan, after which the interest will adjust annually depending on the market. Currently, ARM loans are being offered at an astoundingly low rate of 3.5%. According to CCNMoney, “on a $200,000 mortgage, the monthly ARM payment at 3.5% would be $898 compared with $1,074 for a 30-year, fixed rate loan at 5%.” Clearly this can be a bargain, but it totally depends on how long you plan to own the house. The longer you hold on to an ARM loan, the more “unpredictable” years you will have. For buyers who think they only want to own for 5-7 years, an ARM can save a lot of money over that time; however, if buyers intend to stay longer than 7 years, it’s probably safer to go with a more consistent and predictable, fixed-rate loan.
I don’t think ARMs will ever reach the volumes they did back in 2007, but I do think that they are worthwhile products for borrowers who do their research and use them wisely, and I can see why they are becoming popular once again.