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Special Reports
Biweekly Mortgages
Biweekly Mortgages Come Back Into Favor
By Rick Grant
NEW YORK-There is no new thing under the sun, the saying goes. Nowhere is that
more true than in mortgage loan product offerings, which tend to follow the same cycles the business in general
follows.
Recently, with the threat of delinquencies hanging over a business poised to see
a drop in originations, flexible payment mortgages have come back into favor. Most notably, the biweekly mortgage.
Craig S. Focardi, senior analyst for consumer credit at TowerGroup, says biweekly
mortgages may be a good idea for some borrowers, but they are not a new idea. He worked on product development
for biweekly mortgage programs back when he was at PMI Mortgage Insurance.
"Things come up as new products, but have really been around for a while.
They tend to come and go. They're cyclical," he said. "With respect to the biweekly mortgage, the main
theory is you match the mortgage payment with the borrower's paycheck, since a lot of people get paid every two
weeks."
This serves to smooth out the borrower's cash flow and make it a less risky loan
for the lender because the payments are flowing more frequently.
New technology has taken that a step further. The ability to set up automatic
bank deposits and drafts has added another level of safety for lenders. Borrowers who get their paychecks automatically
deposited each pay period can set up automatic payments via bank draft with the lender. When this is configured
properly, the lender's payments are made like clockwork and the borrower need not worry about keeping track of
the mortgage.
When the products were first developed, it wasn't designed to serve a subprime
borrower, as that market came into prominence later.
Originally, the tool was targeted at borrowers who had good credit, but not a
lot of discretionary income at the end of the pay period.
"People who live paycheck-to-paycheck are not necessarily subprime,"
Mr. Focardi points out, but they are good prospects for this type of loan program.
But he adds that "it is a great tool for subprime borrowers, because these
borrowers tend to habitually get into trouble. They get a month or two late and then they've got to scrounge up
the cash."
But the big question, he says, is are borrowers demanding this or are lenders
pushing it to get to a certain class of borrower.
"I think it's a combination of both," says Mitch Lichterman, founder
and president of Mortgage Saver, a division of AutoLink Payment Services, Los Angeles. The company began offering
biweekly mortgage payment processing in 1996.
"Borrowers are more interested in it because there is more awareness now
and more players in the business are offering the service," he says. "The lenders find it offers them
an additional source of instant revenue, so they are pushing it a little bit more."
He estimates that about 4% of the outstanding loans include a biweekly payment
agreement, the result of slow and steady growth over the past few years. But even with growing interest, Mr. Lichterman
says the business hasn't been growing that much because it's the wrong part of the cycle.
"The last year-and-a-half the growth has been pretty slight," he said.
"But that's because we've been in a low-interest-rate environment and a refi boom. When that happens lenders
get short-sighted. They are busy enough handling the refi calls, let alone offering any additional services like
this."
But he says that as rates continue to edge up, growth in biweekly programs could
spike. He says his company is ready to help lenders process those payments when that happens.
While the concept of the biweekly mortgage may appeal to borrowers and lenders,
what does it do to servicers? In the past, servicing systems configured to accept a single monthly mortgage payment
found alternative payment products difficult.
Today's servicing technology is quite capable of handling these products.
Sadu Thinakal, president of Fiserv Mortgage Servicing Systems, said that biweekly
mortgages and other products that provide greater flexibility for borrowers and greater default management capabilities
are getting more popular with the lenders that utilize his firm's servicing systems. He noted that his firm does
a lot of work with subprime lenders, who are utilizing these options more frequently to target borrowers and then
keep them on track once the loans are originated.
Often the nontraditional borrower and co-borrower are both contributing to the
mortgage payment. To make collection of the combined funds easier, servicing platforms like MortgageServ provide
several options for recurring drafts. This flexibility within the system is designed to increase cash flow for
nontraditional servicers and decrease delinquencies by keeping borrower payments on track. And, according to Fiserv,
lenders are making use of them.
"Once our customers realize that these tools are available in MortgageServ,
they begin to market them to borrowers," Mr. Thinakal said.
In MortgageServ, for instance, the servicer has the opportunity to utilize split
drafts, to take the mortgage payment from more than one bank account, third-party drafts and partial payments.
In addition, the software can be set up on a loan-by-loan basis to take payments monthly, semi-monthly, biweekly
or weekly, to correspond to borrower paydays.
Sadu Thinakal, president of Fiserv Mortgage Servicing Systems, said that biweekly
mortgages and other products that provide greater flexibility for borrowers and greater default management capabilities
are getting more popular with the lenders that utilize his firm's servicing systems. He noted that his firm does
a lot of work with subprime lenders, who are utilizing these options more frequently to target borrowers and then
keep them on track once the loans are originated.
Often the nontraditional borrower and co-borrower are both contributing to the
mortgage payment. To make collection of the combined funds easier, servicing platforms like MortgageServ provide
several options for recurring drafts.
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