In the latest effort by home lenders to push the loan-to-value envelope, a group of companies has created a zero-down-payment loan intended exclusively for retirement plan participants.
Mortgage.com this week kicked off Mortgage Acceptance Program, or Map100. Designed by Chambers, Dunhill, Rubin & Co., a Beverly Hills, Calif., investment banking firm, the loan requires no down payment so long as the borrower can produce documentation of an employer-sponsored retirement plan such as 401(k) savings.
Such borrowers are "ultimately less likely to default," said Barry Kaye, product manager at Chambers Dunhill. "They're shown to be proven savers."
Retirement plan assets would not be used as collateral for the loans, Mr. Kaye said. But "we feel more comfortable knowing the person does have an account out there. If push came to shove, we have a better chance that they'd have a source of repaying the loan because they have another source out there that we know creditors can't touch."
The loans are geared to borrowers who cannot come up with the down payment required for a conventional home loan without borrowing against their retirement savings - which, Mr. Kaye argued, is risky.
For example if someone borrows against a retirement plan and then switches employers, often the company will require the person to pay back any pension-plan loan in 30 to 90 days - which most people aren't in a position to do. If borrowers can't pay back the loan in that tight time frame, the Internal Revenue Service would deem the loan a withdrawal and impose a steep penalty and tax bill.
Pricing on Map100 loans will be 100 to 200 basis points cheaper than for other 100% LTV credits, Mr. Kaye said. Chambers Dunhill will market them to retirement plan sponsors and providers. Already, Scudder Kemper Retirement Services, a unit of Scudder Kemper Investments, has signed up to make the program available to its clients' plan participants.
Mr. Kaye said he expects about $500 million of Map100 loans will be made in the first 18 months. Mortgage.com plans to originate the loans through a Web site and "800" number and fund and close them in its name.
The tricky part is making this most unconventional loan acceptable to investors. According to industry sources, Lehman Brothers is to securitize the loans, with Radian Guaranty of Philadelphia insuring up to 97% of the principal and a limited liability company taking a first-loss position. The plan calls for both Radian and Chambers Dunhill to take equity stakes in the special-purpose company, the sources said.