In what could turn out to be a generational boom for brokers trying to capture younger homebuyers, Fannie Mae has launched what it calls "the Working Mortgage," which allows mortgage payments to be deducted straight from the borrower's bank account on a weekly or biweekly basis.

According to focus group surveys taken by Fannie, people between 21 and 39 can't believe that option isn't already available to low-income buyers -- and people between 39 and 50 can't believe anyone would want it.

"That was one of the really surprising things we found in the focus groups we worked with," said Bob Sahadi, Fannie Mae vice president for housing impact. "Older people we talked to thought (direct withdrawal) was some kind of conspiracy to take money from them. But younger people can't believe it's done any other way.

"They're already used to having car payments, health club dues and other things taken directly out of their bank accounts. For them its peace of mind. When they go to the ATM on Saturday night they want to know the $100 in their account is discretionary income that they can spend without jeopardizing the mortgage or the car payment."

But the real advantage of direct withdrawal is more rapid accumulation of equity in the property, said Sahid, and the flexibility of how the money is taken.

Using the example of a $100,000 mortgage, with biweekly deductions the homeowner would accumulate an additional $4,000 in equity over the first five years of the "Working Mortgage," and almost $10,000 within 10 years.

Not only does frequent withdrawal help reduce the principal over the course of the monthly mortgage payment, but money drawn in the "13th" month of the year would go entirely to offset principal. "That's where the real amortization comes in," Sahid said.

The mortgage will only be available to workers whose employers make direct deposit payments into their bank accounts. A borrower would set up automatic withdrawals that coincide with their pay schedule. As a condition of the mortgage, the borrower agrees to have payments deducted on the same day their pay is deposited.

It also can be tailored to fit the homeowner, including taking parts of payments from each spouses’ paycheck or working out a formula of taking a certain percentage from one account and a certain percentage from another.

Sahid said that early testing of the plan showed that homeowners with direct withdrawal had "significantly" better credit scores than those without it. "Maybe it's because they never really see the money, or maybe its something else, but the fact is that people who have to write monthly checks just don't score as well."

Eventually, Sahid said he hoped the low credit risk score could be factored into the mortgage calculation to give those who hold Working Mortgages yet another break. "I think that's down the road, but I think we'll see it," he said.

The mortgage product will initially be available from Bank One Mortgage, Citicorp Mortgage, FT Mortgage, and Old Kent Mortgage. The pilot program is expected to last about six months before becoming widely available.

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Published: June 17, 1999

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