To celebrate today’s (8/21/2018) rollback of coal emission pollution regulation, I thought I’d get on the climate-denying bandwagon and talk a little trash about how toxic loan features, as designated by the Dodd-Frank Wall Street Financial Reform Act, are making a totally terrific, trending comeback in the world of jumbo mortgage lending. We’re going to look at one structure that we see here in California, particularly in the globally-warmed, higher-cost regions like Los Angeles, Silicon Valley and the greater San Francisco Bay Area. Specifically, I am talking about an interest-only 80-10-10 home loan. That’s right. If you didn’t think you could put as little as 10% down up to nearly a $2MM purchase price, and if you didn’t think you could make interest-only payments upon buying the house, think again. Toxic is trendy when it comes to interest-only (I/O)!
A little history first. No, not about the Cuyahoga River catching fire in 1969. That happened back in a halcyon time when America was great without having to even utter the “again” part. I’m talking about the early-to-mid 2000s in the mortgage world. A borrower back then could get an interest-only loan and he could qualify based on the (much lower) interest-only payments. Regulation quashed all of that and with Dodd-Frank came the Qualified Mortgage (QM) and the Ability to Repay (ATR) provisions. Dodd-Frank said that if a mortgage has an interest-only feature, it CANNOT be a QM. This shifted additional risk to the lender and made it so that any lender who cared to dip is toe into the burning waters of any I/O river would need to take additional measures in proving ATR. In turn, I/O lenders materially increased the qualifying criteria on interest only loans. So yes, you can get an interest-only loan, but you must demonstrate an even greater ability to repay it than if you were to get, say, a fully-amortized mortgage. In other words, an I/O loan gets you a lower actual payment, but a higher qualifying payment. You can’t get the first without the second. You’d need cut a deal with the Russians to perhaps do something like that, but that’s for another blog…
Back to our featured loan program. Let’s say we have a buyer who wishes to purchase a home worth $1,875,000. She wants to put only 10% down and she qualifies for an interest-only payment. We would best accomplish this with a “piggyback” loan, also known as an 80/10/10. Here’s how our structure would work:
- $1,875,000 Purchase price
- $1,500,000 First mortgage (as an interest-only loan)
- $185,625 Second mortgage or “piggyback”
- $189,375 Down payment
The monthly payments on this structure, mostly irrespective of interest rates at any given time, will be approximately 25% less than on a similar, fully-amortized program. For the right buyer/borrower, that can make this program an effective financial and budgetary tool. Not a lot of lenders understand this program and a few still don’t even know it exists. But if you feel you have both the financial profile and the need to swim with the toxic swamp fishes, I’m just your kind of mortgage deplorable.
(All kidding aside, there are two things I take very seriously; my job as a mortgage loan originator and leaving the planet in a better place for future generations.)
Distant early warning,
Vice President of Mortgage Lending
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