On Monday, January 18th, 1988
The Wall Street Journal says:
Biweekly Loans Seen
Helped By Fannie Mae
Your Money Matters
By Mary Lu Carnivale, Staff Reporter for The
Wall Street Journal
WASHINGTON -- The Federal
National Mortgage Association plans to purchase biweekly mortgages beginning
February 1 -- a move that will increase the availability, and possibly improve
the terms, of the loans.
Rates for biweekly
mortgages are comparable to those of 30-year, fixed-rate loans, but payments are
made every two weeks, for a total of 26 payments a year. Each payment is equal
to half of the monthly payment on a 30-year loan, and the extra payments each
year shorten the payoff period to about 20 years.
When repaid on a biweekly
schedule, a $70,000 mortgage at 10.5% annual interest produces a savings of
$60,000 compared with a standard 30-year payback.
'A Lot of Sense'
"Making mortgage
payments correspond to America's payday makes a lot of sense," says Roger
E. Birk, Fannie Mae's president and chief operating officer. About half of U.S.
workers are paid biweekly.
Fannie Mae, as federally
chartered, publicly traded corporation, operates a secondary market for home
loans. It purchases residential mortgages from lenders, holding a portion of the
loans in its portfolio and repackaging the rest for sale as securities.
So far the biweekly
mortgages have been mostly offered in the Northeast and, to a lesser extent, in
the Midwest. Many lenders, however, have shied away from offering biweekly
mortgages because of the costs of servicing them. For some, a big deterrent has
been the prospect of having to alter their own computer-software programs to
keep track of the loans.
Fannie Mae's entry into
the biweekly mortgage field is expected to broaden the instrument's
availability. By providing a ready secondary market for the loans, Fannie Mae
would relieve individual lenders of the burden of packaging them for private
placement with investors or for sale on Wall Street. And by cutting the lender's
costs of handling such loans, and increasing the competition among lenders
offering the loans, Fannie Mae's move should also reduce the interest rates
charged on the loans.
Dennis Campbell, Fannie
Mae's senior vice president for marketing and product management's, estimates
that 150 to 200 lenders already offer some form of biweekly mortgages. "We
think we can help grow the market" he says.
For the time being, the
biweekly loans will be held in Fannie Mae's own portfolio, but they could be
packaged into mortgage securities and sold to investors if their popularity
takes off.
Fannie Mae believes this
type of mortgage could appeal to many home buyers who want to reduce interest
payments over the life of the loan and build up equity faster. Of course,
borrowers already can make additional payments to reduce interest expense, but a
biweekly program establishes a structure for speedier payments.
One institution that has
found strong demand for the loans in Mechanics & Farmers Savings Bank in
Bridgeport, Conn. Linda Kelly, a vice president, says biweekly loans have
totaled $800 million since Mechanics & Farmers began offering them in 1984.
At times the loans have accounted for 80% of the thrift's mortgage volume.
Small Niche?
But others see a
relatively small niche for biweekly loans. Dennis Jacobe, research director for
the U.S. League of Savings Institutions, says the biweekly loans have been
available for a few years, but "they haven't caught fire." He notes
that the additional payments essentially double lenders' servicing costs, and
most borrowers are content with writing a check once a month.
Last year, Fannie Mae
purchased $73.6 billion of home loans from January through November, holding
$16.8 billion in its portfolio and issuing $56.9 billion in mortgage-backed
securities. Of the purchases for its portfolio, 43% were in 30-year, fixed rate
conventional loans.
But the popularity of
other types of loans is growing. Adjustable-rate mortgages accounted for 9% of
the purchases and fixed-rate loans with maturity rates of less that 30 years
accounted for 37%.
Meanwhile, Fannie Mae's
closest rival, the Federal Home Loan Mortgage Corp., says it plans to buy
biweekly mortgages, too, but the timing hasn't been set. According to a Freddie
Mac spokeswoman, "It is a question of when, not whether."
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