The Right Product At The Right Time

BLOG VIEW: Albert Einstein was once quoted as saying that the definition of insanity is ‘doing the same thing over and over again and expecting different results.’ It is interesting that we can look around and identify this ‘insanity’ all around us, but we can rarely see it in ourselves â�¦ or in our industry.

For decades, there was very little innovation in the mortgage industry. Then, securitization evolved and things changed. From the late 1970s to the early 1990s, a host of new products were introduced, each one beginning their life with a very bumpy start. First were the adjustable-rate mortgages (ARMs) – a great idea designed to take advantage of a very steep yield curve – but they were a major industry sore spot for several years while the kinks were worked out.

After the introduction of ARMs, we saw new products like graduated equity programs, low-doc programs, and even no-mortgage-insurance programs. Each had major issues in their early iterations. The exotic loans that followed had so many kinks, the entire industry was ‘worked out.’ Regulators stepped in, believing they could, and were obligated to ‘fix the industry,’ and that is where we find ourselves today â�¦ with a cure that is probably as bad as the disease. In each era, new products were developed by people unfamiliar with the past – and we repeated our history.

A major problem with this history is that the motivation was generally simply to sell more loans. The underlying goal each time was to appeal to a new or broader set of borrowers. To go ‘down-market,’ or enable borrowers to buy more home, or with less down, or with payments that would rise as their incomes rose. The most fundamental challenge the industry had from the early 1980s until the 2008 meltdown was that there was a major information gap between the investors that financed the mortgages long term and the lenders that made the loans on the front end.

Today, because of the 2008 debacle, we as an industry are back to the basic product lineup we had almost four decades ago. Underwriting has swung like a pendulum to the overly conservative side, but is slowly swinging back to the middle. Subprime loans would be a faint and distant memory if not for the problem loans we still deal with today. Most investors ran from the mortgage market with their balance sheets tucked between their legs – and most have not returned.

Part of the problem is that there are still many houses underwater and it takes an extremely long time to negotiate a short sale. This both reduces the inventory of available homes in the marketplace – and will continue to do so until we see a true, sustained recovery in housing prices. Additionally, this ‘underwater inventory’ is a huge potential default risk for the industry – and thus continues to make the industry nervous and cautious about extending new loans. Housing inventory, in general, has been low in recent years because flat wages, economic uncertainty, and reduced relocations and hiring are making consumers cautious about buying new homes – and especially about upgrading to larger ones.

While the mortgage and real estate industries cry, "Buy! Buy! Buy!" at the top of their lungs, limited mortgage products, tight underwriting and a lack of housing inventory have combined to keep the industry struggling. Periodic updates from Robert Shiller about another "housing bubble" continue to remind the public that we are not ‘back to normal,’ whatever that may be.

So we make loans, but only the highest quality, in order to offset the ‘at-risk’ loans we still carry on the books. No matter what "incentives" have been thrown at home buyers in the last six years, home buyers have reacted with apathy because, basically, to paraphrase Ecclesiastes, ‘There is no new thing under the sun.’ As a result, one of the largest segments of our economy and a leading economic indicator wallows idly, waiting for ‘something’ to finally boost it back to health and normalcy.

But what is it?

Aside from the industry itself, other factors are playing into the big picture. Politicians are worried about Social Security and the lack of retirement savings in the U.S. Because of the real estate meltdown, many seniors have minimal home equity, and can't even meet reverse mortgage requirements. Low contributions to, and low growth in, retirement accounts like 401(k)s and IRAs has compounded the problem. Add that to longer life expectancies and longer periods of time in retirement and the importance of healthy real estate markets becomes blindingly obvious.

Can the real estate and mortgage industries find ways to be a part of the solution to this unprecedented set of challenges, or are we destined to approach the market with the same insanity that we have in the past � one we may have learned from our close relative, Uncle Sam.

To be part of the solution will require a new approach. One that takes into account the needs of the borrowers, the needs of the lender and industry, the needs of the investment community, and the goals and needs of society (we use ‘society’ as a more lofty way of thinking about it, rather than just as the goals of legislators, who may have ulterior goals or motives). It is with this ideal in mind that a few innovators around the world have come forward with new products that enhance the value proposition for the borrower while also expanding the reach of lenders and investors, all while reducing risk to all vested parties.

One such loan that began making the rounds back in 2007, before the market ‘correction’ of 2008, is the Mana Loan, which has recently resurfaced as a topic of discussion. The Mana Loan is a unique combination of a mortgage loan and a savings program built on an insurance chassis that creates a financial safety net for the borrower, in case of financial hardship, and a source of ongoing mortgage payments for the lender and investor.

For the borrower, the Mana Loan offers a wide array of features, including the following:

  • May require no money down;
  • Structured to create a rapid equity buildup;
  • Provides a fully funded life insurance policy;
  • Guarantees mortgage loan pay-off in case of death of insured;
  • Allows partial or skipped payments;
  • Builds a fund for the extended rainy days or market fluctuations; and
  • Creates supplemental retirement income and nest egg.

Beyond providing benefits to the borrower, the Mana Loan has significant benefits for the lender and investor as well, including the following:

  • Encourages consumers to start purchasing homes again;
  • Offers increased (above-market) mortgage interest rates;
  • Provides additional collateral in case of default (but);
  • Reduces defaults because of skip payment options;
  • Provides for full loan payments to investors, even when borrower is in a financial crisis;
  • Guarantees mortgage loan pay-off in the event of the borrower's death; and
  • Reduces the mortgage balance faster.

While no loan program is perfect, the Mana Loan is a unique approach to lending that leverages a mortgage and unique insurance side-account, allowing borrowers the ability to fund the purchase of their home in a more tax-friendly and efficient way, while giving them an immediate nest egg and an emergency fund to meet unexpected financial crises. In fact, the Mana Loan would have allowed most borrowers to remain in their home for as long as two years after their job losses in 2008, giving them time to readjust and recover. For more than 70% of conforming borrowers, that would have been enough to help them regain employment, recover from the job loss, and to preserve their family's dignity, along with their home.

For the industry, this would have saved billions in loan losses, allowed it to escape much of the negative publicity associated with the wave of lender refinances, and probably avoided much of the heavy-handed and over-reaching regulation that has since been implemented.

While hindsight is 20-20, the Mana Loan was actually developed to help homeowners buy a home without the fear associated with losing their home if they lose their jobs, because most homeowners become delinquent within 90 to 120 days after a major income loss. Because this was the original impetus behind Mana Loan's design, it was a solution for a small, but common, problem that became a major industry-wide disaster.Â

Going forward, it may be a perfect match for an industry with a persistent problem, that is now finally in search of a viable solution without simply tightening underwriting guidelines.

As a result, the Mana Loan is attracting new interest from lenders and even the government-sponsored enterprises. As with any product innovation in this industry, investors can be the slowest to adopt, but we believe that with the inherent risk mitigation components and borrower support structure designed into Mana Loan that investors will embrace this product as they become more familiar with it.

Richard Beidl is founder and CEO at Phi Beta Kapital Investments, Inc. For more information about the Mana Loan, contact Evelyn Nichols at

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