A Flexible Payment Mortgage
Last year I began writing a column on home mortgages that appears in a number of newspapers and on the Web. It invites readers to send in questions. Several thousand have done so, and responding to them has proved quite an education.
The most interesting thing I have learned is that many mortgage borrowers try to manage their mortgages rather than just sit on them. And as many have found out, the existing instrument is badly designed for that purpose.
This article explains why the standard American mortgage does not meet the needs of a large proportion of borrowers. It also describes an alternative mortgage designed to work in conjunction with providing borrowers Internet-based access to their account records. The combination of the new instrument and access to account records would empower borrowers to manage their finances in new and flexible ways. At the same time, it would allow lenders to communicate with their customers in the most targeted and cost-effective manner possible.
The problems that borrowers have with the current mortgage design can be illustrated by sharing a few of the letters I have received, along with parts of my responses.
Rigidity of the monthly payment obligation
Perhaps the feature that causes the most problems is the absolute rigidity of the payment obligation. Here is a sample letter:
"I wasn't able to make my April mortgage payment last year, the first time in two years that happened, and I have made every payment on time since then. But my lender sends me late-charge notices every month since that happened. And when I applied recently for a credit card, I was told that I was a high-risk customer because of my mortgage payment delinquencies. I only skipped one payment, so what is going on?"
What, indeed. I was obliged to inform this borrower that:
"Your loan contract does not give you the right to skip a payment. The payment you skipped made you delinquent, and you have stayed delinquent ever since.
Under the accounting rules used for amortized mortgages, lenders always credit a payment against the earliest unpaid obligation. When you made your payment last May, you received credit for April, which meant that your May payment was late. When you made your payment in June, it was applied to May, leaving the June payment delinquent, and so on. A borrower who skips a payment but pays regularly thereafter stays delinquent (and accumulates late fees) until the skipped payment is made good...
In another letter, a borrower who was unable to meet the January payment did exactly what borrowers are supposed to do in this situation: She consulted the lender, who consented to accept one-third of the January payment with the February payment, one-third with the March payment and the remaining one-third with the April payment. The borrower managed this, yet found herself saddled with four 30day delinquencies on her credit report!
The current mortgage does not allow a borrower to skip any part of a payment under any circumstances. This is bad for lenders as well as borrowers because a borrower who gets behind and doesn't have the means to catch up may be on...