A mortgage with life insurance Fannie Mae weighs paying )) insurance on unpaid loan balances

Nation's Housing

February 09, 1997|By Kenneth R. Harney

THE NATION'S largest source of home mortgage money has been developing a new -- and potentially controversial -- life insurance concept designed to pay off borrowers' unpaid loan balances when they die.

Dubbed the Mortgage Protection Plan, the program has been under active design for more than six months at Fannie Mae, the congressionally chartered, private corporation based in Washington that purchases billions of dollars of home loans originated across the country every year. At least two major insurance firms, New York Life Insurance Co. and Minnesota Mutual Life Insurance Co., have confirmed they are working with Fannie Mae on designing the program.

Fannie Mae spokesman David Jeffers said last week that the corporation will not decide until April at the earliest whether, and in what form, to launch the program. He refused to discuss any details of the project.

However, an internal Fannie Mae document outlining the program describes a concept that would offer home-loan borrowers and mortgage lenders significant incentives to take part. The document represented the state of the program as of "several months ago," according to Jeffers, who verified its authenticity but warned that certain details may have changed, or will.

According to the document, loan applicants at participating mortgage lending firms would be offered the opportunity to obtain a form of life insurance that would guarantee full payoff of their mortgages in the event of their death. Better yet, there would be no out-of-pocket charge for the insurance to the borrower. Instead, Fannie Mae would pay the premiums to life insurance companies through a new administrative entity, MPPA Inc., set up to run the program.

The sole cost to the consumer would be in a federal tax liability on the "imputed income" represented by Fannie Mae's premium payments.

According to the document, a 40-year-old borrower taking out a $150,000 new mortgage with life insurance would face $107 of imputed income during the first year of the loan. A 60-year-old taking out the same size loan would incur $407 in first-year imputed income because life insurance rates are higher for older individuals.

At tax time, borrowers would add this imputed income onto their gross income for the year, and pay federal tax on it based on their marginal income tax rates. Participating mortgage lenders would provide information to loan applicants about the new insurance program prior to closing the loan, and would obtain a signed consent form from the borrowers and send it to MPPA Inc. for insurance company underwriting. As compensation for marketing the program to borrowers, lenders would receive a fee from Fannie Mae for each policy written.

The draft plan's attractions to consumers and lenders are clear. But what would motivate Fannie Mae to spend substantial amounts of money buying life insurance on its own borrowers? Mortgage applicants who make down payments of less than 20 percent already are required to pay for "private mortgage insurance" to protect Fannie Mae from loss in the event of defaults and foreclosures.

One benefit clearly would be enhanced market competitiveness. Participating local lenders would have a new incentive to direct more of their loans to Fannie Mae, rather than to competing secondary market investors, such as rival Freddie Mac. Another possible benefit would flow from the insurance death benefits themselves. The loans paid off would be those either owned by the corporation or included in the huge, security-backed loan pools it markets to bond investors.

What could be another major benefit, though, is not as obvious. According to the financial projections in the internal document, Fannie Mae could stand to book huge profits from the Mortgage Protection Plan by borrowing money for the insurance premiums at preferential, quasi-federal agency rates in the capital markets, deducting the cost of borrowers' premiums against its federal corporate taxes, and receiving an annual interest on its life insurance premiums from insurance companies.

The document projects that for $5 billion in premium payments with an annual yield of 4.75 percent, Fannie Mae would chalk up nearly $100 million a year in net income by the third year, $216.4 million in the 10th year, $589 million in the 20th year, and nearly $950 million in the 30th year. Even for a company with net earnings of $2.72 billion last year, these numbers are substantial.

Last week, Fannie Mae officials briefed one of its federal regulators, the Office of Federal Housing Enterprise Oversight (OFHEO) on its Mortgage Protection Plan. Although OFHEO officials declined comment on the briefing, questions likely to be raised by analysts of Fannie Mae's new concept include:

Does the program represent a sophisticated vehicle to lend low-cost, tax-deductible dollars to private insurance companies to produce a new profit center for Fannie Mae and the insurers?

Could participating mortgage lenders have a new financial incentive to steer borrowers to Fannie Mae loans, even when the consumer might benefit more by taking out some other loan?

Is designing or financing a side business in credit-life insurance the sort of activity sanctioned by Fannie Mae's congressional charter?

Fannie Mae officials declined repeated requests for comment on the program the firm is designing. Regulatory and congressional officials are likely to begin taking a closer look in the coming weeks.

Pub Date: 2/09/97

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