Des Moines Business Record
01-01-07
New mortgage product on the horizon
By Joe Gardyasz, joegardyasz@bpcdm.com
If you saw an advertisement for an adjustable-rate mortgage loan that would
automatically lower your rate when interest rates drop, then keep that low rate
even after rates move back up, your first thought would probably be, "That
sounds too good to be true."
On second thought, you might ask, "Where can I get one?"
In August, Bert Ely, a public-policy analyst in Washington, D.C., and Andrew
Kalotay, a New York bond expert, obtained patent-pending status for their
concept, which they named the Ratchet Mortgage. The process combines a
mortgage with an interest rate that adjusts downward based on an index such as
the 10-year Treasury bond rate with "ratchet bonds" that would be purchased by
institutional investors to fund them. Ely said they are now in discussions with
large mortgage originators about licensing the product, which has the potential to
both significantly reduce the industry's refinancing volume and in the process,
create "stickier" customer relationships.
"This means a lot less money will be spent on refinancing costs," Ely said in a
telephone interview. "So there are real economic payoffs that will be passed
along to homeowners in interest rates."
Rick Carter, a finance professor at Iowa State University, said he has read
about the concept online, and plans to use it as a discussion point in his classes
next semester.
"When I looked at, the first thing that came to my mind is, 'this is terrific for the
borrower," Carter said. "This is one reason we pay a lot of money for insurance,
to protect ourselves from rising rates."
According to a recent survey by the Mortgage Bankers Association, refinancings
in December 2006 accounted for just over 50 percent of total mortgage activity,
the highest level of refinancing activity since April 2004. However, the percentage
of applications for adjustable-rate mortgages decreased to less than 24 percent
of total applications, its lowest level since October 2003.
Ely says his product would smooth the boom-bust cycle of refinancing activity, to
the benefit of both homeowners and mortgage originators.
"The homeowner doesn't have to go shopping around," Ely said. "It will lead to a
more optimally timed rate reduction. Otherwise you end up with leapers or
laggers. Rarely do they get it just right. … This is something I think would clearly
have overwhelming consumer appeal. Again, the challenge is you've got to have
people willing to offer it, and that's the business challenge."
Is this an offering that West Des Moines-based Wells Fargo Home Mortgage,
one of the largest mortgage originators in the country, may be considering?
Debora Blume, a Wells Fargo spokeswoman, declined to comment on the
concept, saying that she could only talk about products her company presently
offers.
Dan Krieger, chairman and president of Ames National Bank and chairman-elect
of the Iowa Bankers Association, commented: "I'd be surprised if [Wells Fargo]
did go with it, without good assurance that interest rates aren't going to go up. I
think it might be something that credit unions would like."
In regard to customer stickiness, however, the product has a lot going for it, said
John Sorensen, president of the Iowa Bankers Association.
"It's a perfect product for [a mortgage lender] to reduce the risk of customers
refinancing and losing that customer to another institution," he said.
To protect the lender from losses from falling interest rates, the mortgages will be
linked to debt instruments similar to those that Kalotay developed for the
Tennessee Valley Authority, which will have the effect of passing the interest-rate
risk on to institutions that invest in those securities, Ely said.
"What is key is the linkage, and the challenge in getting this going is getting the
funding ball rolling," Ely said. "There aren't any funding instruments out there.
This is a classic case of introducing a new funding instrument for the financial
market. There are also issues with how you service these things and how you
market them."
As an incentive for mortgage brokers to offer these products, Ely said he believes
the broker should receive a higher commission on them.
Ely said he hopes a partnership with a major lender will be announced within the
next six months to a year.
"We don't have a hard-and-fast timetable on that," he said. "We want the initial
licensee to be really committed to it. These are large organizations with lots of
moving parts. It's not something they're plunging into overnight."