The mortgage market has a new hybrid product, the asset integrated mortgage, that offers lenders another hook for selective consumers.How the AIM Loan Works Traditional Mortgage AIM Mortgage Purchase Price of Home $100,000 $100,000Cash Available $20,000 $20,000Cash Down Payment $20,000 $5,000AIM Annuity $0 $15,000(2)Loan Amount $80,000 $95,000(1)Borrower's Assets at Work $100,000 $115,000Loan Balance (After 30 Years) $0 $0AIM Advantage (Annuity Value) $0 $95,000(2) (After 30 years; 6.2% estimated rate of return) 1 AIM Investment is supplemental credit enhancement on the mortgage;therefore, mortgage insurance is not required. 2 Actual results may vary depending upon program eligibility, participationand repayment term.
Here's a home-brewed recipe some lenders think may tempt finicky mortgage shoppers: Take a traditional mortgage, blend it with a fixed-rate annuity, and tell the borrower that he or she needs to put less cash down--and may get paid back as much or more than he borrowed over the life of the loan.
It's the Asset Integrated Mortgage (AIM), a product brought out this summer with modest fanfare by Financial Integration Inc. of Cleveland, in partnership with Fannie Mae. Starting with five good-sized mortgage lenders in late July, the program had expanded to 18 by mid-September, including some wholesalers.
The AIM allows a borrower willing to take out a larger loan and accept a steeper payment schedule the chance to recoup what he or she has invested over the course of the loan. In a typical example, a borrower could put just 5% down on a 30-year, $100,000 loan and simultaneously buy a $15,000 fixed-rate annuity. At an average 6.2% rate, the annuity would grow to $95,000--just what the homeowner borrowed. He or she would own the home, and have a nest egg as well.
Moreover, even though only 5% is put down in cash, the annuity serves as mortgage insurance, sparing the borrower added costs. "Consumers, in effect, are able to put their down payments to work for them," says Frank Demarais, vice president of product development at Fannie Mae.
More than that, the AIM lets a borrower diversify assets and minimize risk, says Van P. Carter, president of Financial Integration. Return on the annuity "lowers the total cost and creates a financial safety net that is not dependent on the uncertainty of property value."
Predictably, some consumer pundits have questioned whether the borrower might ultimately be better off by taking out a conventional loan with lower payments, and investing the difference between those payments and the AIM payments in stocks or mutual funds for a potentially higher return.
Perhaps, but Financial Integration thinks it has a winner. In focus groups, 83% of those asked said they would have preferred an AIM to the mortgage they did take, says Deborah Nells, manager of marketing and sales support. She says the phones have been ringing and ringing with lenders interested in hearing about the product.
"We have more and more customers wanting it," says Tom Wolfe, senior vice president at Society Mortgage Co. in Cleveland, a KeyCorp unit and the first lender in the country to offer the AIM. "At this point, we're just responding to customers who have heard about it. We're doing 5% or 6% of our business with the product without any advertising at all." While it's currently available just in northeastern Ohio, he says Society plans to take it national next year.
Wolfe says likely AIM customers include affluent borrowers who have multiple investments and want more asset diversification; others who want to avoid mortgage insurance and like the idea of a forced savings plan; and a group interested in "gifting" an annuity into the house for relatives.
The single-family loans can be fixed or adjustable, with the same rates and terms as traditional mortgages. Fannie Mae will buy the loans on a negotiated basis for cash or mortgage-backed securities execution, and document preparation and servicing has been put in the hands of specific contractors.
Participating insurers guarantee that the initial investment will be available to Fannie in the case of default at any time the loan is in force. For borrowers unable to meet the combined 20% down payment, Mortgage Guaranty Insurance Corp. has developed special coverages.
If the loan is paid off early, the borrower can keep the additional accumulated cash value from the annuity or use the annuity to obtain another AIM loan. When the loan is repaid, the borrower has four options: drawing on the annuity in conventional monthly installments; taking it in a lump-sum payment; keeping the annuity in force and building it; or using part of it for a down payment on another house.
Nells says the "contract rate" on the annuity in mid-September was in the 6.5%-6.9% range. All participating insurers must be Triple A-rated, and the annuities must be approved by Fannie Mae. Currently, only American General and American International Group are selling annuities with the AIM, says Nells. Financial Integration offers salespeople for lenders in states that bar annuity sales by bank personnel.
The first five lenders involved were Society; BancPlus Mortgage Corp., San Antonio; Directors Mortgage Loan Corp., Riverside, CA; Hamilton Financial Corp., San Francisco; and Inland Mortgage Corp., Indianapolis. The AIM is currently available in 32 states, and FI wants to be "in as many states as possible" by year-end, Nells says.
Hamilton Financial calls its AIM product the Total Equity Return Mortgage !TM^. Hamilton president William Rast says the company will offer it through its national corresponding lending division and then through its national branch network.
Financial Integration is pushing the AIM with one hand and working to protect it with the other, having filed for two patents. And unlike another annuity-related product introduced this year, the Retirement CD, this involves insurers as potential sellers--and hasn't stirred up a hornet's nest of protest.
"As a banker, you look at this and you say it's a good product," Wolfe says. But skepticism about newfangled offerings dies hard, and bundled products like the AIM raise that a notch. "The problem is everyone thinks you're cheating," Wolfe says. "It's hard to convince people that they should be looking at other opportunities."