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Special Reports
Not Your Father's ARM Loan
Wells Adds 10-Year IO to Product Menu
By Amilda Dymi
DES MOINES, IA--Wells Fargo Home Mortgage added a 10-year interest-only adjustable-rate
loan option to its existing list of five-year and seven-year IO ARMs so it can generate new business while better
serving the needs of customers interested in redirecting their cash-flow and investment strategy.
Neil Bader, the branch manager of Wells Fargo Private Mortgage Bank for the New
York area, believes Wells Fargo's 10-year IO ARMs may help generate new business by filling a gap in the company's
loan product mix.
It is a 30-year mortgage with a 10-year fixed rate IO period after which the loan
fully amortizes "to the extent that somebody keeps the loan."
"Obviously the rates are different in different places," he said, "but
the average 10-year ARM in most places in the country probably sells at an interest rate of above 5%, maybe mid-fives."
Among the various categories of borrowers who would benefit the most from this
option, Mr. Bader said, "No. 1, I think it's people who live in areas where there is decent appreciation and
would probably benefit more than people who have absolutely no appreciation. There are certain areas where they
do not have appreciation or depreciation, unlike New York and California for instance.
"The interest-only feature is a great option for customers who need to invest
funds in other ways," Joe Rogers, executive vice president for pricing, products and programs within Wells
Fargo Mortgage's National Customer Lending Sales area, said upon the launch of the product. "To some a home
is not their best or most important asset-building tool. To others a short-term ability to lower payments each
month works with their long-term cash or asset management strategies."
Mr. Bader also sees the benefit tied to personal investment strategy.
For instance, he argued, if a homeowner "is looking to retire on equity on
their home, this should absolutely not be the product they should take, especially if it will be for the next 10
years because if they start with $400,000, they will end up with $400,000."
On the other hand, other clients such as those who earn uneven income, people
who are paid seasonally or on a bonus basis may benefit from the product, the executive said, because besides being
a flexible product, and IO for the first 10 years, it does not require a pre-payment penalty. These borrowers can
mitigate the cost throughout the years and contribute interest only during the first 10 years until they get paid
and than they can amortize the loan.
"So it does not mean this product is for someone whose philosophy is that
they do not care about amortization," he noted. It could potentially be for someone who cares about amortization
but has a specific goal in mind, or knows when he/she will get paid at a later time.
Secondly, the product is a good choice for those who want to afford a larger home.
One of the special features of the product is qualifying borrowers on the IO payment, which are always lower than
a fully amortized payment.
"Since we use debt ratios or cash-flow ratios to qualify people, the lower
the payment is theoretically the more you are able to qualify for," he said, "It is a great tool for
people who want to qualify for more mortgage."
Many mortgage market experts agree that traditionally IO ARM loans tend to become
more popular after refinancing booms are over providing an alternative solution to rising interest rates, yet it
is five-year ARMs or seven-year ARMs that appear to be more in demand, leaving 10-year ARM options far back on
the popularity list.
But it is exactly because five-year ARMs are so widely provided that Wells Fargo's
product fills a gap.
"That's what makes the product so special," the executive said. "People
who have risk aversion and wanted to be in something fixed for 10 years, couldn't always have it. It was not always
available. We wanted to meet the needs of all our customers."
It also depends on how long a homeowner wants to stay in the property. A 10-year
ARM serves well those who are a little bit more conservative in their housing choices and needs and do not plan
to move in five or seven years. The benefit list to the customer is longer than the above, he said. "The question
really is what do customers think they can return on their money. Is it 10%, 7% or 5%?" Case-scenarios are
different. Some borrowers may be interested in aggressively investing their money, who see the opportunity to pay
interest only for 10 years and use the saved money to invest in something else.
"That is not so much an issue, which is what we talked about before, not
even a matter of appreciation and depreciation, it is a matter of having a better way of using the money as compared
to paying amortization," Mr. Bader said. "And this is without even taking into consideration tax effects.
Like with everything else in life, you need to have a strategy."
Inflation is another factor for borrowers and brokers to consider.
"When you start talking about a long-term debt, inflation matters. We never
have deflation, we always have inflation," the executive noted. "So one would rather pay the low money
now and then as it devalues, you can make your payments later in the game."
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