Ownit Mortgage Solutions Inc., the nonprime lender run by the industry veteran William Dallas, is betting on a 45-year mortgages as the future - at least in the near term - of nonprime lending.
Julie St. James, the Agoura Hills, Calif., wholesale lender's senior vice president and director of capital markets, said in an interview Monday that the product, which the Ownit Holdings LLC unit introduced in November, tries to take on two of the primary challenges of today's nonprime borrower: affordability and principal reduction.
Ownit's niche nonprime borrower is typically a first-time homebuyer who often has "some sort of credit blemish" and is "challenged by the high price of homes," Ms. St. James said. But as the principal drops, so does the amount of interest the borrower will eventually end up paying, and a borrower who builds up equity in the home is more likely to stay there and continue making payments, she said.
The 45-year loan's chief competitor is the interest-only loan, whose lower monthly payments are attractive to many borrowers, she said. Ownit's pitch: Why not pay a little more each month and build equity rather than end up with zero equity accumulated when the loan adjusts?
A chart provided by Ms. St. James looked at how a 50-year amortization schedule, a 45-year one, and an interest-only period would affect the principal reduction after five years on a $250,000 loan with a 6.5% interest rate.
The 50-year loan would have a monthly payment of $1,409.29, and the principal would drop by $3,895.94 in the first five years, according to the chart. The 45-year loan would have a monthly payment of $1,431.60, and the principal would drop by $5,472.66. The interest-only loan would have a monthly payment of $1,335.62, but the principal would not drop at all.
When each of the loans' interest rate resets (most of Ownit's loans reset after two years and have a 30-year term with a balloon payment at the end), the borrower with the 45-year loan would benefit the most, because of the reduced principal, while still having a low monthly payment, Ms. St. James said.
Currently, 60% of Ownit's loans have a 45-year schedule, she said, and she expects that percentage to climb to 70%. The rest of its loans are split between interest-only and fixed-rate. The company typically requires interest-only borrowers to have a FICO score of 700 or above; for the 45-year loan, the average score is 630.
Ownit looked at the 50-year schedule, which other firms have offered in recent months, but decided against offering it, because it would not let the borrower build up as much equity as the 45-year schedule and would not reduce the monthly payment by very much, Ms. St. James said.
Keith Gumbinger, a vice president with the Pompton Plains, N.J., mortgage research firm HSH Associates, said that even though stretching amortization can improve affordability, the advantage depends on how much higher an interest rate the borrower is charged for having a longer amortization schedule.
Ms. St. James said that the premium Ownit charges for a 45-year schedule, as opposed to a 30-year one, is an eighth of a percentage point.
Mr. Gumbinger said the premium is "not terrible," and a higher one would make such a loan not so good a deal. "A one-eighth differential can reduce mildly the budget-stretching benefit," he said. Also, "the higher the loan amount, the greater the differential in payment."
