A new 50-year mortgage from Provident Savings Bank in Riverside, Calif., has been a hit with homebuyers, but some competitors dismiss it as a marketing gimmick and say they have no plans to offer it.
The $1.6 billion-asset thrift has processed or closed about $30 million of the loans since it first offered them, in February. And Rich Gale, the mortgage banking division president, said the pipeline for the loans is filling up.
“The phones are ringing off the hook,” he said.
Provident is one of a handful of banks and mortgage companies that have started offering 50-year mortgages in recent months to homebuyers who want low monthly payments but are spooked by interest-only loans.
Industry observers say demand for the new product will probably increase in expensive housing markets like San Diego, the San Francisco Bay area, Boston, and Washington.
“We feel it’s a great alternative to the interest-only loan, where you pay no principal whatsoever for a period of time, and then there’s a payment shock when it’s reamortized,” Mr. Gale said. “With a 50-year loan, you have a low payment and you’re actually paying down principal every month.”
Provident offers two types of 50-year mortgages: one with a fixed rate that has a balloon payment after 30 years, and a hybrid that has a fixed rate for either three or five years and an adjustable rate every year afterward.
Though interest-only loans are still far more popular — the thrift originates about $75 million to $100 million of the loans a month — Mr. Gale said the 50-year mortgage could become a “viable alternative” for many homebuyers. It allows them to “buy more house because the monthly payment is lower” than with a 40-year mortgage, he said.
Some of Provident’s rivals, however, say the differences between the alternative mortgage products are negligible.
Babette E. Heimbuch, the chief executive of First Federal Bank of California, a longtime option-ARM lender, said the thrift does not need to offer 50-year mortgages to compete with lenders like Provident.
“We feel like it’s more of a marketing ploy than anything else,” said Ms. Heimbuch, who is also the CEO of the Santa Monica thrift’s parent company, the $10.6 billion-asset FirstFed Financial Corp.
Most people who take out alternative mortgages refinance after a few years to maintain the lowest monthly payment possible, Ms. Heimbuch said. Consequently, the real difference between the mortgages is the amount of the initial monthly payments. On a $400,000 loan the difference between the initial payments of a 40-year option ARM and a 50-year mortgage would only be $87 a month, she said.
“There might be customers who would think the 50-year mortgage would be great,” she said, “but it would not be hard to sell them on the fact that it’s irrelevant.”
Even though the monthly payments might differ by a slight amount, some lenders might see a way to differentiate themselves with 50-year offerings, James Cotton, Freddie Mac’s vice president of single-family marketing and outreach, told American Banker last month. “Part of it is: What makes the phone ring?”
Hans R. Ganz, president and CEO of Pacific Trust Bank in Chula Vista, Calif., said his thrift has a better alternative than the 50-year mortgage, or any other mortgage: a mortgage, home equity line of credit, and checking and savings account all rolled into one.
Customers approved for Pacific Trust’s so-called Green Account never get a monthly mortgage bill; instead, the bank automatically debits mortgage payments from an associated demand account.
The more money the customer puts into the demand account — payroll deposits, money from maturing certificates of deposit, money from savings accounts, or funds that otherwise would have been placed in money market or other nondemand accounts — the larger the reduction in the principal balance of the loan and the subsequent monthly finance charge.
“Our product gives an astute borrower more flexibility on managing his funds,” said Mr. Ganz, who is also president and CEO of the $755 million-asset First PacTrust Bancorp Inc.
He conceded that the Green Account is not for everybody, as a maxed-out home equity line of credit could easily wipe out any savings in interest costs. Pacific Trust was the first bank to offer the product in the United States, launching it last July; the product has long been popular in England and Australia.
Janet Frank, director of mortgage finance at America’s Community Bankers, said all the alternative products help more people buy homes in expensive markets. But she said lenders should qualify borrowers using the fully indexed rate that would be charged after the initial discounted rate, to ensure people do not buy homes they cannot afford.
Pacific Premier Bank in Costa Mesa, Calif., offers only 30-year mortgages, says Steve R. Gardner, the president and CEO of the thrift and its parent, the $685 million-asset Pacific Premier Bancorp Inc.
“Over all, credit standards have gotten progressively looser and loan terms too long, and our concern is that consumers are just leveraged very highly,” Mr. Gardner said.
