The evolution of mortgage products marches on.
The lending unit of the real estate investment trust New York Mortgage Trust Inc. this week rolled out an adjustable-rate mortgage that caps the rate for the first 10 years at 6.99%. Typically, ARMs made today have cap structures that could lead to double-digit rates within 10 years.
The idea behind New York Mortgage's product is to let borrowers benefit from falling rates but not get hurt too much by rising ones - and to remove their incentive to refinance when rates drop.
"The last thing we want is to put all this work into the borrower … and six months from now, if rates go down, the borrower is gone," said Steven R. Mumma, the REIT's chief investment officer and chief operating officer, who led the product's development. There is more such risk now, because "the borrower is far more sophisticated than he has ever been."
The Homeowner Protection ARM has a 6.5% teaser rate for three months, and then adjusts monthly at a margin of 1.5 percentage points over the London interbank offered rate. (Today, the fully indexed rate would be 6.875%, just below the average rate offered for a 10-year hybrid ARM.)
Aside from the 6.99% cap, during the first 10 years the borrower is permitted to pay interest only, but the rate also has a floor of 4% for the life of the loan. (Other lenders' ARMs have a variety of cap structures, dealing with how much their rates can change initially, in later adjustments, and over all.)
Asked about what would happen to the holder of a Homeowner Protection ARM if Libor moves much higher, Mr. Mumma said the risk could be hedged in a way similar to what is done with ARMs whose rates are fixed for 10 years.
"You're constantly, as a mortgage portfolio person, battling interest rate risk on the one side, and convexity risk on the other."
The product was rolled out in New York Mortgage's retail channel Tuesday. It will be available to its brokers in the next few weeks, said Steven B. Schnall, the REIT's chairman, president, and co-CEO.
New York Mortgage says several investors are interested in buying the product. It "fits perfectly for somebody that has the attitude that they think the Fed is done or almost done," Mr. Mumma said. But Mr. Schnall said it plans to securitize the loans on its portfolio, and the only question will be what parts of the cash flows to sell.
Keith Gumbinger, a vice president with HSH Associates, a research firm in Pompton Plains, N.J., said the product appeared unique and, at least judging from what New York Mortgage said about it, very consumer-friendly.
"In this business, desperation breeds innovation," he said.
Mr. Schnall said it was too soon too tell what kind of volume his lender should get from the loan. It originated about $605 million of loans in the first quarter, when its net loss narrowed to $1.8 million.
He added: "I think it's one of the most amazing products from a consumer perspective. It blows away the option ARM."
Equity Evils?
Despite uncertainty about whether there will be another Federal Reverse rate hike, a further flight of borrowers from existing home equity lines may be coming.
If so, CNNMoney.com and CBS News may get some of the credit.
An article posted on the Web site Monday and headlined "Helocs from Hell" said "they're not all bad. The interest on Helocs is deductible and they can be used to retire more expensive debt."
But the article generally encouraged borrowers to immediately pay off their HELOCs with spare cash; do so with a cash-out refi, if their first mortgage's rate isn't too low; or do so with a fixed-rate equity loan.
Last week the author and radio host Dave Ramsey told the news program's audience, "The 'H.E.L.,' the home equity loan - sometimes it just means they left off the 'L' - these things are bad news."
His advice: "get it paid off as fast as you can. … If you need a long-term loan, take out a good quality mortgage, where you get that [rate] locked in for 15 years with the great interest rates we still have, and you're not all over the map, at the bank's whim, on the interest rates."
Speaking of HELOCs, an American Banker reporter got an unsolicited call Wednesday from a representative at JPMorgan Chase & Co., which owns his first mortgage, letting him know he was "prequalified" to take one out, at no cost. (About $400 in closing costs the lender would eat would have to be repaid if the line is closed within three years, the salesperson said.)
He said that "a lot of the time when I talk to clients, when they don't need one turns out to be the best time to get one" - the rainy-day argument for HELOCs. He also cited the ability to deduct interest from taxes and the lines' debt-consolidation benefits. The representative did not appear to be armed with an estimate on the value of the reporter's apartment.
Cash-Outs Climb
Meanwhile, on the cash-out front, Freddie Mac said in a quarterly report released Wednesday that the percentage of refis that resulted in at least 5% higher loan balances has continued to rise.
It climbed 2 percentage points from the first quarter, to 88% last quarter. It was the highest ratio since the second quarter of 1990.
