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A new type of Mortgage

Have you ever thought that it would be nice to be rewarded for staying with the same mortgage lender? Maybe even rewarded for reducing your loan to value?

Today, it crossed my mind that the banks need to provide an incentive to keep people on their books and to stop flip flopping between lenders.

In todays economy, where bank are laden with heavy loan balances in comparison to the deposits, it would be advantageous for them to be able to offload some of these mortgages as RMBS. The problem, it appears to me, is that many of the loans do not have enough equity, and appear high risk. In addition, there isn't much of a margin on them either.

So, I thought, what can be done to improve this?

One idea I had was for the banks to offer a rate discount incentive, or become fixed from variable apr if the property was revalued and found to be worth 20% - 30% more than the note. As this would technically be refinancing, wouthout offering additional funds, the new note would show a 75% ltv, and this loan could easily be sold on, rather than as a 90% ltv. The problem with this idea I found was that many residential properties have lost value.

So what next I thought, well, what if the banks offered the mortgagee a discount for reducing the balance of the outstanding note, or even offered to transform the variable apr to a fixed  note if the ltv was reduced to 75% - 80% from say, 90% - 95%. The goal in this instancde, is not to reduce the profitablility of the loan for the bank, but to make the loans attractive to investors of RMBS. 

It could be a REWARD Mortgage, take out a note for 95% ltv, and the rate is, say for the purposes of this blog, 7.5% apr. Should the mortgagee reduce the mortgage to 90% ltv within 12 months, the note would reduce to 7.25% apr, and become fixed for 2 years. If the mortgagee then reduces the note a further 5% to 85% ltv, then the note will be reduced to 7% apr and become fixed for 5 years. 

For example, John Doe buys an appartment for $100,000. He puts down 5k as a deposit and is offered a 2 year fixed apr of 6.5% and variable thereafter. Well, during the first 12 months, he receives a bonus, or an EITC of 5k, and decides to reduce the mortgage, because hey, there's an actual reward for doing it now! So he puts that 5k towards his mortgage balance and has now a 90% ltv, but he's now met a new threshold, and is eligible for a rate reduction of 0.25% apr and the note is fixed for 3 years. The next year he does the same, and reduces his original ltv to 85%. This time his note becomes 6% apr fixed for 5 years. This continues until he has an ltv of 75% and his note becomes fixed for the remainder of his loan at 5.5% apr. The banks offering these loans would find it much easier to sell the mortgage notes on, and not be left with an ever increasing balance sheet, which can affect the capital ratio, and make the bank look risky.

Either way, both parties win. The reward would not be reflective of the current valuation of the property, but on the original purchase price and ltv. So even if the property appreciates, the reward only becomes effective if the original ltv is reduced in comparison to payments made.  To make it even better, the mortgagee can transfer the mortgage to another property, thereby truly being rewarded for longevity, and payments. this could be achieved by crediting the mortgagee with the old balance, against any new purchase, for example:

John Doe originally purchased property1 for $100,000 and reduced the ltv to 75% with a fixed apr of 5.5% for the duration of the loan. He was never late paying and wishes to sell his property and buy property 2 which is for sale for $150,000. John Doe has $10,000 to put towards the purchase as a down payment, leaving a balance of a new loan of $65,000

The original loan balance of 75K fixed at 5.5% apr for 30 years is carried forward to the new property, and the additional $65,000 is financed at 6.5% apr fixed for 2 years, and variable thereafter. 

John Doe reduces the ltv to 90% within 12 months, and receives a discount of 0.25% apr on the $65,000 portion of the loan, and that portion becomes fixed at 6.25% apr for 3 years. The next year he reduces his ltv to 85% and receives a further discount of 0.25% apr. His new apr is 6% on the 65k portion of the new loan and now fixed for 5 years, and the original 75% is fixed at 5.5%. This continues until John Doe reduces his combined ltv to 75% and he receives a fixed apr of 5.5% for the duration of the loan.

I think this is a truly rewarding mortgage. This would give people an incentive to reduce their mortgage balance in increments, to receive discounts. 

The main benefit, is that the customer would receive a reward for being a good long term customer, and that reward is transferable.

Well, if I owned a bank, that's what I'd do.