Realty Times October 14, 2002

Fannie Mae's New Loan Program Breaks The Oldest Rule of Lending
by Kenneth R. Harney

A new mortgage plan now available from a handful of lenders around the country allows home buyers and refinancers to break the oldest rule of lending: Borrowers can skip monthly payments periodically without hurting their credit standing, angering the bank, or getting hit with a late fee.

Known as "Payment Power", the plan is being field-tested by at least six lenders under arrangements with Fannie Mae, the giant Washington, D.C.-based home loan investor. Under the new mortgage's terms, borrowers can opt to miss up to two monthly payments per year, or as many as 10 payments over the full 30-year term of the loan. The missed payments--including principal, interest, taxes and other escrowed items--are rolled into the remaining principal balance of the mortgage. The principal balance is then amortized without increasing the term of the loan--in effect, financing the unpaid amounts via slightly higher monthly payments over the regular term of the mortgage. There are no balloon payments involved, nor can the number of months remainng on the loan be increased.

On a $100,000 30-year loan at 7 percent, for instance, the first skipped payment would add less than $9 to the monthly mortgage bill for the remaining term of the loan. Further skips would raise payments by additional amounts. Lenders are required to report missed payments as on-time payments to credit bureaus, provided the borrowers requested the skip in advance, and were authorized by the lender to do so.

To qualify for the loan, buyers or refinancers will need strong credit histories at application, and will need to make on-time payments in all months except those where they opt to skip a payment. The idea, according to lenders in the field test, is to provide flexibility for borrowers in several categories:

  • First-time home purchasers who are stretching their budgets to afford the house, and who would welcome the opportunity to miss a payment or two in the early years of the loan.

  • People whose incomes vary from season to season, or unpredictably. Examples include teachers whose incomes decline during the summer months, construction workers whose hours drop sharply in the cold winter months in some locations, and factory workers whose production lines are shut down sporadically because of lagging sales in the retail marketplace.

    Home buyers or refinancers who simply have some doubts about the sagging economy, and who'd like a little cushion built into their mortgage, just in case.

    The new "payment power" loans--which may be marketed under different brand names--carry interest rates and other terms identical to regular conventional mortgages purchased by Fannie Mae. The main differences are the contractual right to skip that is spelled out in the loan documents, and a small upfront participation fee (about $600 on a $100,000 mortgage) that can be paid by the borrower or split with someone else, such as a builder, a Realtor or private seller. The program will be available on 1-2 unit homes and on condominiums.

    Toledo's Northern Ohio Investment Co. already has begun marketing the new program under the name "Rainy Day" mortgage. Giant Countrywide Home Loans, based in Calabasas, California, says it plans to roll out its version of the mortgage in December. Other participating lenders, according to Fannie Mae, will be kicking off marketing campaigns in the coming weeks.

    Could a "payment power" loan be in your future? If Fannie Mae's field tests demonstrate that the skip feature is a sound investment, look for it to become available everywhere, as a standard mortgage option.


    • Copyright © 2002 Realty Times. All Rights Reserved.

    With an award winning staff of writers providing up to the minute real estate news and advice, thousands of REALTORS® in North America reporting daily market conditions, and a nationally broadcast television news program, Realty Times is the one-stop shop for real estate information. That's why over 10,000 real estate professionals have turned to us for their publicity needs.