The mortgage slump is forcing lenders to come up with ever more creative ways to get business.
A case in point is a series of one-way adjustable mortgages introduced in recent weeks. Last week First Tennessee National Corp.'s home lending unit came out with a subprime twist on this trendy product. And last month Countrywide Credit Industries of Calabasas, Calif., and New York-based Greenpoint Financial announced they will make loans with rates that can be cut if market rates fall but are capped if they rise.
FT Mortgage Cos., a Dallas subsidiary of Memphis-based First Tennessee, said it is marketing a loan for people with damaged credit that offers a one-point rate reduction after the borrower stays current on payments for two years. The Mortgage Motivator loan is designed to give such borrowers an incentive to improve their credit records.
Countrywide's and Greenpoint's products target prime borrowers and are intended to spare them the cost of refinancing and the hassles that come with it, such as getting new title insurance and appraisals and paying legal fees. In all these cases, the impetus to offer such loans clearly comes from this year's industry downturn, the result of higher interest rates.
"Everybody is more focused on trying to capture a bigger share of the remaining business out there," said Rick Pishalski, senior vice president of secondary marketing at FT Mortgage. "That's why you'll see more of this type of innovation come out of mortgage lenders, assuming we stay in this rate environment."
Some observers said the recent offerings from Countrywide, FT Mortgage, and Greenpoint suggest seismic changes. "They are evidence that power in the mortgage industry is shifting from the investor to the consumer," said K. Terrence Wakefield, chief executive officer of Customers Forever LLC, a Milwaukee firm that helps big servicers retain borrowers.
The Internet will accelerate that shift, said Mr. Wakefield, who helped build the mortgage operations of Prudential Insurance Co. of America in the 1980s.
Fannie Mae came out in 1988 with a product called the Rate Improvement Mortgage. It never took off because it was priced at a premium to other loans, industry veterans recalled. But now lenders believe they have found ways to price convertible loans at or near the market level.
Mr. Pishalski said FT Mortgage is pricing its Motivator loan about 140 basis points higher than A-quality loans - which, he said, is "in the ballpark with other subprime products."
Pricing these loans attractively is a challenge, given that the rate can only go down. One would think the investors who buy loans from mortgage bankers would demand extra yield to compensate for the downside.
Market sources said Fannie is the buyer for both FT Mortgage's Motivator loans and Countrywide's eEasy Rate Reduction Plan mortgages and is keeping the loans in its portfolio rather than securitizing them. A Fannie spokeswoman declined to comment.
Mr. Pishalski declined to say what company or companies in the secondary market are buying the Motivator loans. All he would say is that they would not be placed in First Tennessee's portfolio. "We don't portfolio subprime product," he said.