Redesigned mortgages offer new benefits, protections

Nation's Housing

July 21, 2002|By KENNETH HARNEY

YOUR NEXT home mortgage could come with bells, whistles and services you've never imagined.

How about a mortgage that has built-in warranty coverage to fix the roof or replace the heating system, pipes and other big-ticket home system breakdowns?

How about a home loan that allows you to skip payments - up to six months' worth without penalty - when you run into unexpected cash-flow problems?

What do you think about a mortgage that would tap you into a health and disability insurance coverage plan for you and the family that costs less than the one you have now? Or a loan that wraps nearly all of your household credit needs into a single, expanding package, a tax-deductible pot of spendable cash whenever you want or need it?

Or special features aimed at first-time and immigrant buyers that allow them to qualify for mortgages despite lack of credit histories, lack of cash and unconventional income sources?

These innovative concepts not only are on the drawing boards of mortgage designers. They are heading for the marketplace within as little as a few months. Here are some of the most noteworthy new loan plans coming your way.

Skip-payment loans. Think about what worries you most as a homeowner or prospective buyer. If you're like many Americans, your household finances are stretched. You make a solid income - probably a dual-earner income - but you've got expenses that gobble up that income month by month, from car payments to tuition to taxes.

You have little or no protection against an unanticipated interruption of income, or a sudden, major emergency repair for the house. If your spouse loses his or her job, or you get hit with a large, uninsured medical expense, you could be plunged into a financial crisis possibly serious enough for you to fall behind on your debt obligations.

Where could you turn for help? Fannie Mae, the giant home loan investor, is working on a two-word answer: your mortgage. Fannie Mae executives envision a new generation of loans with built-in, automatic protections against household financial meltdowns.

One concept, tentatively named Home Stay, would provide up to half a year's worth of mortgage payments when borrowers lose income because of disability, death of a spouse or unemployment.

Say you were laid off as part of one of the many corporate reductions. The company gave you a modest severance payment, but it was hardly enough to cover your family's expenses for the extended period you need to find a new job.

Meanwhile, your biggest monthly debt - your home mortgage - has to be paid.

Under the Fannie Mae concept, your home loan would pay for itself for as much as half a year while you're unemployed and strapped for cash.

Fannie Mae executives emphasized that key details - such as the cost to borrowers and the type of insurance add-on - are being worked out. But they are convinced that such a financial backstop feature would address one of the deep-seated fears of many mortgage customers.

The target for introducing the new loan is possibly late this year or early next year.

Fannie Mae's rival Freddie Mac also reportedly is exploring unemployment add-ons and other insurance concepts as part of its future mortgage offerings.

Home warranty loan. A second plan at Fannie Mae would provide still another form of built-in financial protection for homebuyers.

Dubbed Home Manager internally, the idea is to graft a home warranty plan onto your basic home mortgage. The warranty coverage would extend at least to all major mechanical systems and would be available through a preferred provider program, allowing you the choice of contractors.

If your roof needed replacement or your heating and air-conditioning system died, you'd be able to pick from a list of local service companies participating in the Fannie Mae program to make the repairs.

Pricing, timing and other details are being worked out, say Fannie Mae executives, but the concept is likely to be available within the year.

Home Manager and Home Stay emerged from intensive consumer research and focus groups conducted by the corporation over the past two years. They are expected to give extra oomph to Fannie Mae's efforts to increase homeownership rates among lower-income, moderate-income, minority and immigrant groups.

Fannie Mae Chairman Franklin D. Raines has hinted at other innovative loan changes on the horizon, including the possibility of customizing mortgages to borrowers' needs. One example is the "teacher loan," a mortgage with principal and interest payment schedules tailored to incomes that tend to be concentrated in nine-month time periods.

Next: maximizing the benefits and uses of a mortgage.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071. Or e-mail him at kenharney@aol.com.

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