Magnificent Mortgages


Maine bank breaks the rules with innovative wealth-building home loans

By Ellen Ryan

Most homebuyers love the long-term stability of the standard 30-year, 20-percent-down mortgage. It’s by far the most popular home loan used today. But what homebuyers wouldn’t want a no-down-payment mortgage that allows them to start building equity almost immediately? And what homebuyers wouldn’t further like to cut in half the period of their mortgage payments?

Sounds improbable, perhaps. Sounds like a 15-year mortgage, with a major no-down-payment twist. The $900 million-asset Androscoggin Bank in Lewiston, Maine, is offering such easy-in mortgages with a much shorter term than is typical.

Ever since the bank began offering these loans two years ago, homebuyers have adored them, says Joe Ferris, the bank’s vice president and manager of residential lending. Moreover, these loans are considered safer than a 30-year mortgage and are profitable to originate.

But Androscoggin Bank’s wealth-building mortgages weren’t introduced willy-nilly. They were researched and analyzed carefully. Like most denizens of Maine, Ferris is practical. When he read about how to safely offer such mortgages to the bank’s home-buying customers and still make the bank money, Ferris took a circumspect approach.

One reason is because the idea behind this innovative mortgage product existed mainly in the minds of two scholars at the American Enterprise Institute, an entrepreneurial think tank in Washington, D.C. AEI researchers Edward Pinto and Stephen Oliner developed the equity-boosting mortgage concept, called the Wealth Building Home Loan. The duo found that such mortgages are less risky than the popular 30-year loans, allow homeowners to quickly establish equity, and encourage buying the right-sized house.

The key to the viability of these 15-year mortgages for banks involves a complicated relationship with Community Reinvestment Act credits, Ferris explains. That’s because these loans are especially terrific for first-time and possibly low-income homebuyers. For that reason, these mortgages can do some social good as well.

“We have a better piece of collateral. We have the CRA benefits. The bank gets a lot of publicity and goodwill.”
—Joe Ferris, Androscoggin Bank

Concept to reality
Adopting his own scholarly skepticism, Ferris talked to the AEI researchers for months and ran his own models geared to the commercial world. A lot of banks do certain CRA projects one year and start anew with others the next, he thought. So Ferris began a for-profit program of the AEI Wealth Building mortgage concept that existed only on paper.

Since December 2014, Androscoggin Bank’s 15- and 20-year Wealth Building mortgages have grown to 30 percent of the community bank’s new home loan originations. In 2015, there were 50 such loans totaling $10 million. This year, they’ve averaged four or five a month.

Here’s how Ferris explains the benefits. Say a couple obtains a Federal Housing Administration loan, and three years in, they divorce. Or, in another case, perhaps a spouse of a borrower dies. With little equity, under both scenarios it would be almost impossible to refinance those loans, and the owners or owner looking to sell the home would likely have to pay a buyer’s closing costs.

With a 103 percent, 15-year Wealth Building loan, cash to close on a $175,000 house is just $2,600, counting the application fee. No private mortgage insurance is needed. After 41 months, homeowners have built 20 percent equity. They can refinance if needed or sell with their credit intact.

After seven years, the mortgage’s fixed interest rate jumps, but the new rate applies only to remaining principal, not to the initial loan amount. The roughly 13 percent payment shock is certainly lower than for a regular adjustable-rate mortgage.

The Word is Out—Helped by Androscoggin Bank’s promotions, the bank’s Wealth Builder Loan program is drawing significant attention from homebuyers in its marketplace.

The Word is Out—Helped by Androscoggin Bank’s promotions, the bank’s Wealth Builder Loan program is drawing significant attention from homebuyers in its marketplace.

And the bank?
“We have a better piece of collateral. We have the CRA benefits. The bank gets a lot of publicity and goodwill,” Ferris says. “And we make money. Not an enormous amount—but if we get 85 cents on the dollar and all the other benefits, that’s better than zero and satisfying some auditors.”

But when homebuyers put so little money down, Androscoggin Bank takes a huge default risk, right? “That is a common and expected misperception,” Ferris says. In fact, there have been no defaults in the bank’s wealth-building mortgage program.

What makes it work?
Part of the reason is that payments must draw automatically on an Androscoggin Bank checking account. More to the point, though, is the structure of the loans themselves—all that equity built early “considering just payments, not even appreciation,” Ferris points out. “So then it’s less risky.”

AEI has studied Androscoggin Bank’s program. “After one year, a homeowner with a 100 percent loan-to-value 15-year loan would have about 10.3 equity, while the 95 percent loan-to-value, 30-year FHA loan with the 1.75 percent upfront FHA premium financed—which it is 90 percent of the time—would have 8.7 percent equity,” Pinto confirms. “Thus the first borrower has more equity after one year.”

Further, adds Pinto, the bank’s wealth-building loans are deemed less risky. “We applied our loan risk-rating methodology to the Androscoggin loans,” he says, “and found a stress default rate of 5.3 percent compared to a rate of 13.2 percent for the same loans characteristics, except changing to a 30-year term.”

Some economists think the country is due for another recession soon. What about these mortgages then?

“This bank is in much better shape than otherwise,” Ferris says, agreeing with Pinto. If homeowners run into trouble, “I can go into forbearance, extend a loan to 30 years or modify in some other way. But if I have a 30-year note and no equity and have to foreclose, what am I supposed to do—extend it to 40 years?”

Furthermore, Ferris says the word is out in Lewiston and beyond about the bank’s wealth-building mortgages. Many people want them, and Androscoggin Bank is happy to be the first bank in the country to offer them.

Ellen Ryan is a writer in Maryland.