Preston Martin, a former Federal Reserve Board vice chairman, and Dan McConnell, founder and former chairman of Invest Financial Corp., San Francisco, have joined forces to offer a new product that combines a mortgage and a life insurance policy.
Also involved in launching the hybrid is Robert A. Christie, formerly chief financial officer of Transamerica Financial Corp., who conceived the product.
They have formed HomeVest Financial Group Inc., which was capitalized earlier this year by its management and three investors: Conning & Co., Hartford, Conn.; Burr, Eagan, Deleage & Co., Boston; and Allstate Insurance Co., Northbrook, Ill.
The high profiles of the principals should help attract attention to the product and give it credibility, industry observers said. A spokeswoman for Countrywide Credit Industries, Pasadena, Calif., confirmed that Countrywide was considering the HomeVest plan and was "excited about the possibility of adding an insurance product."
Countrywide's Pasadena neighbor, Cenfed Bank, has begun to market the package, and dozens of midsize to large vendors are in the final stages of reviewing contracts, HomeVest said.
The product is a relatively simple one, even though the legal underpinnings are extensive and complex. Instead of making a 20% down payment when buying a house, the homebuyer uses the money to buy a cash- value life insurance policy and gets a 100% loan.
The downside is that the homebuyer will have to make larger monthly payments. But on the plus side, tax deductions are higher, earnings on the life insurance accumulate tax-deferred, and the death benefit increases over time. Also, the life policy has a guaranteed minimum return of 4% a year.
The bottom line, according to HomeVest, is that the net after-tax cost of buying a home is significantly reduced, and the life insurance "provides a hedge against declines in real estate value."
In an example provided by HomeVest, a 32-year-old buyer of a $200,000 home who has a 22.5% down payment would pay $368,440 net of taxes over 30 years the conventional way, while the cost would be $240,242 under the HomeVest plan.
The HomeVest founders are hoping that recent significant changes in the mortgage market and in consumer psychology will provide a ready market for their product.
"There has been an extreme change in the mortgage marketplace, with the wave of mergers and acquisitions," said Mr. Martin, who is chairman of the new company. "Now boards of directors are looking with a jaundiced eye at the mortgage business. And mortgage companies are looking for other sources of income."
On the consumer side, he said borrowers had become increasingly wary of price risk because of the sharp declines in home prices in some parts of the country in recent years. "People have never had the uncertainty they face today. They've seen that their equity in their home can be wiped out."
Mr. Martin also noted that younger people are saving at what he called an unprecedented rate.
A source close to the company said Fannie Mae was expected to announce soon its formal approval of such mortgages for purchase.
Mr. McConnell, president and chief executive, is a marketing veteran who made a reputation as a third-party vendor of investment products, mostly to customers of thrifts, while at Invest. He said people in focus groups gave high marks to a number of aspects of the HomeVest product.
"They liked the idea of the alternative use of the down payment," he said. "They also saw it as a form of compulsory savings, and as a conservative strategy in financial planning." The groups also liked the fact that the safety features began immediately, he said.
Providers of the life insurance will include Lincoln Benefit Life, Lincoln, Neb.; Jackson National Life, Lansing, Mich.; and AIG Life Insurance Corp., Wilmington, Del. Others are expected to be added, HomeVest said.
Participating mortgage insurers will include PMI Mortgage Insurance Co., San Francisco; and United Guaranty Corp., Greensboro, N.C.
