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New Loan Products
Give Buyers Plenty of Options

New York Post

By Jennifer Robison

August 21, 2004 -- After Alice London inherited two apartments at 2 Fifth Ave. five years ago, she took out a $400,000 loan to buy a third apartment next door. London combined the properties to create a three-bedroom, 3,200-square-foot haven with 3,000 square feet of outdoor terrace - and a mountain of equity.

So London is tapping into that equity with a fresh $650,000 mortgage. But despite the bigger loan, London's monthly payments are dropping, from around $2,000 to $1,800.

What accounts for the lending legerdemain? A LIBOR-based loan, which Dennis Raico, executive vice president of the New York Mortgage Company, calls "the newest and best product" on the lending market.

LIBOR loans are just one in an array of up-and-coming mortgage products. Portable mortgages, 40-year loans, hybrid fixed- and adjustable-rate loans and low-documentation financing are among the offerings banks are issuing to drum up business.

"Banks are trying to be more creative in their products to keep their volume going," says Manhattan Mortgage's Melissa Cohn, who brokered London's LIBOR financing.

LIBOR BENEFITS

LIBOR-based loans are increasingly popular. The loans are indexed to the London Interbank Offered Rate - the rate of interest at which banks borrow from other banks in the London market - rather than the U.S. Treasury market, which measures securities sold to raise money for servicing federal debt.

"[The LIBOR] is a lagging index," Raico says. "Our treasuries have a tendency to move up and down more quickly, while the LIBOR moves at a much slower pace. Also, LIBOR products are adjustable on as short as a monthly basis. You're taking a risk every month, but you can get a lower gain in the interest rate."

Cohn says she's handled LIBOR loans on a six-month adjustable basis with interest rates as little as 2.78 percent.

In addition, Raico says borrowers could pay only interest in the first 10 years of a LIBOR-based loan.

LIBOR loans aren't for everyone. Cohn recommends them for those "whose incomes will go up, who won't be in the property very long, who are willing to take a risk on refinancing or who think they might inherit money or get a big bonus."

Adds Raico: "They're mainly for the financially savvy borrower - someone who is willing to understand the market and realize that although there is some risk, the benefit far outweighs the risk."

London, an agent with Brown Harris Stevens, is one such confident borrower. The new loan is actually her second LIBOR-based mortgage; the first offered a fixed rate of 7 percent until a year ago, when it dropped to around 6 percent. Her latest loan is 2.875 percent, with interest-only payments that adjust every six months. With her $650,000, she is paying off her $400,000 loan and investing the remaining $250,000 in her son John's hedge fund, SuttonBrook Capital Management.

"I'm banking on interest rates not rising that much," she says. "It's a gamble, but it allows me to invest the difference and get some money back to go toward the payment of the loan."

MAKE IT PORTABLE

Another novel financing concept entails portable mortgages, which homeowners can carry from home to home. However, just one bank - E*Trade Mortgage - has developed a portable product in the United States.

Consumers and banks alike have been slow to embrace such loans for numerous reasons, Cohn says. First, because the borrower keeps the mortgage for a longer period of time, exposure to risk for the lender is greater. That increased risk translates into interest rates of up to a full percentage point higher than the going rate.

Also, the mortgages are good only for your original loan amount, so you could run into financing issues if you have a $300,000 loan and you want to move up to a $600,000 home. And since the loan's collateral - the home - is available for trade, portables aren't popular on the secondary mortgage market, where investors buy loans from banks to provide capital for further lending.

A LONG-TERM HEDGE

For homeowners looking for a hedge against the future, 40-year mortgages are a solid bet. Cohn advises such extended financing for borrowers on interest-only payment plans, which can stress homeowners' finances when the principal comes due.

For example, a 30-year loan with an interest-only payment for the first five years converts to a 25-year loan after the interest-only period expires. That means a substantially higher payment because the principal is spread across a shorter term.

A 40-year loan, with interest-only payments the first 10 years, will convert to a traditional and more affordable 30-year term.

And high-end home buyers can also now opt for hybrid loans, which Cohn says allow consumers to "mix and match" loan types, choosing a fixed rate on part of the mortgage and an adjustable rate on the rest.

Even sub-prime loans - those for consumers with poor credit - are enjoying newfound variety. Raico says sub-prime loans come "in a slew of new products that have gotten better and more flexible."

"Some sub-prime loans even offer interest-only features," Raico adds. "Options are still limited, but those with the 'best of the worst' credit scores can get rates in the very, very low [5 percent range]."

Lenders aren't simply tweaking rates and terms to originate more loans; they're also paring down the application process itself. With precise credit scoring and automated approval, lenders need less qualifying information such as income verification, says Rick Piette, owner of Premier Mortgage Lending Group in Las Vegas.

The result: low- and limited-documentation loans, which are ideal for the self-employed or other consumers with good credit but an inability to substantiate income.

"In today's market, there is a product for everybody," Raico says. "The product mix today is so elaborate that, depending on your income, assets, credit and the [property], there is a product that suits your needs."

New York Post 8-21-04

New Loan Products Give Buyers Plenty of Options

New York Post

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New Loan Products
Give Buyers Plenty of Options