Hingham Institution for Savings has enjoyed great success with its 20/20 Mortgage, which has a 40-year term with one single rate adjustment after 20 years. The bank introduced the loan last year.
Last year, Hingham Institution for Savings introduced a new way for borrowers to have more cash in their pockets each month. The 40-year mortgage, which tends to receive mixed reviews within the industry, has proven to be a major success for the South Shore bank. While many lenders have yet to aggressively offer such a long-term loan, the secondary market is noticing some demand and Fannie Mae recently announced it would begin purchasing the loans from lenders.
Hingham Savings’ 20/20 Mortgage has a 40-year term with one single rate adjustment after 20 years.
“20/20 has made up half of our mortgage volume [since its introduction last year],” said Michael Sinclair, vice president of retail lending at Hingham Savings.
The bank has originated 116 mortgages for $38 million using the 40-year product, Sinclair said.
“It has exceeded what I anticipated,” he said. “People who thought there wasn’t a need for 40-year [mortgages] were wrong,” Sinclair said.
One-third of 20/20’s volume has been refinance. The typical borrower for this loan varies and can include first-time homebuyers.
“It appeals to a wide range of borrowers,” Sinclair said. “It’s for people looking for more cash flow.”
The bank lends statewide, but Sinclair said there have been several borrowers who used the 20/20 loan to purchase a second home on Cape Cod. The average loan tends to be $327,000, but the bank will loan up to $3 million. Currently the rate on the 40-year loan is 5.63 percent with no points.
‘A Great Opportunity’
Sinclair has said in the past that the product is designed for those looking for the security of a fixed rate since there is only one rate change, which comes in the 20th year of the loan.
Along with a positive response from borrowers, Hingham Savings has received similarly uplifting feedback from real estate brokers. Sinclair said the bank has done business with several new brokers since introducing the loan.
Others in the industry haven’t seen the same demand or success with 40-year loans as Hingham Savings. Leader Bank in Arlington has only made a few 40-year loans, according to James Madigan, Leader’s president.
“A couple out of thousands and thousands of loans [have been 40-year terms],” Madigan said. “We haven’t seen much call for it.”
However, Madigan said that could change.
“It will [become more popular] if it becomes widely available as a 40-year fixed rate,” Madigan said.
Brian Koss, senior vice president of Countrywide Home Loans in Waltham, said the 40-year loan has worked well for smaller banks.
“It’s a great opportunity for them and the role they play,” Koss said.
However, Koss said it is unlikely that larger mortgage companies will see enough volume to offer the 40-year mortgage.
The secondary market is also confident the 40-year mortgage is more than just a fad. Earlier this month, Fannie Mae announced it would expand its purchasing of 40-year loans and consider it a standard product.
Fannie Mae has dabbled in purchasing of 40-year loan products since September 2003, when it created a pilot program that its Credit Union Advisory Council decided to offer to credit unions. Twenty-two credit unions throughout the United States participate in the program, including the Vermont-based Credit Union Mortgage Exchange, which has an office in Lexington.
With Fannie Mae announcing its backing of the 40-year mortgage, some local lenders said that support will help make the loan a more mainstream product. Charlie Nilsen, New England regional manager at JP Morgan Chase in Braintree, said Fannie Mae’s presence will certainly make people more aware of the loan.
“It creates more credibility for the product,” Nilsen said.
He added that there has been “very thin” interest from investors to purchase the 40-year mortgage in the past.
Fannie Mae’s participation also will likely qualify more borrowers, he said.
For Hingham Savings, the secondary market is not a concern right now. Sinclair said although Fannie Mae said it will purchase 40-year loans, it doesn’t mean it will purchase Hingham Savings’ particular 40-year product. And while he added that the bank has been approached by several private secondary market investors interested in purchasing the 20/20 loan, he said the bank is uninterested in selling at this time.
Nilsen said he expects the 40-year loan to enter the marketplace slowly, but he is confident that it will.
“We’ll actually see them slowly come into the market,” Nilsen said. “It will slowly creep into the marketplace.”
Nilsen called the 40-year loan a “compromise” between the 30-year mortgage and the popular interest-only mortgage that allows a borrower to pay only interest on his or her outstanding balance for the first few years of the loan. After that, the payment readjusts to include principal and interest and the loan is reamortized for the remaining years.
Because the interest-only mortgage has crept into the mainstream, Nilsen said credit standards are tightening up on the loan.
“There is increasing credit concern about interest-only,” Nilsen said.
In lieu of the interest-only loan, Nilsen said JP Morgan Chase is aggressively marketing the 40-year feature on all of its programs.
“[It is] a little more responsible for some borrowers,” he said.
However, Koss said the bottom line for many customers tends to be the lowest payment and an interest-only loan can usually provide that, instead of the 40-year term.
Although JP Morgan Chase has been offering the 40-year feature for about a year, Nilsen pointed out that unless the product is being marketed, there is less awareness.
“People aren’t going to look for it unless we introduce it,” Nilsen said.
As the 40-year mortgage appears to pick up steam in both the local and national marketplace, Sinclair said he is proud to know Hingham Savings was innovative in designing a product to meet the needs of the marketplace.
“We were the first to come out with [a product like 20/20],” Sinclair said. “Someone had to take that step.”
