Newrez, the mortgage origination and servicing businesses of
The IO period runs through the first 10 years of the loan, with the product being made available across all of Newrez's lending channels: retail, wholesale, correspondent, joint venture and direct to consumer.
"We are continually enhancing and updating our Smart Series products to ensure we are providing competitive non-QM financing options for our clients in current market conditions," said Jeff Gravelle, Newrez co-head of production, in a press release. "Our Smart Series products, like the 40-year IO, are developed to meet the needs of today's borrowers and open the door to thousands of prospective homeowners."
While much of the current chatter around 40-year mortgages has revolved around loan modifications, particularly for
Even as a Fannie Mae executive
Now, at the same conference held 17 years later, the 40-year product again came up during a panel on what's new in nonagency mortgages.
A panelist from Deephaven Mortgage, Shelly Griffin, said her company was coming up with a product similar to the Newrez offering. And that caught the attention of fellow panelist John Toohig, managing director at Raymond James & Associates.
While the non-QM market has been growing since 2014, practically none of these products have the IO feature, Toohig said in an interview.
However, IO loans in general have more demand in coastal cities that have high property values like Los Angeles, San Francisco and, even occasionally, New York.
"But until Deephaven and then a host of others started talking about the 40-year paper, that was really what caught me off guard," Toohig said. "I hadn't heard that before, and that was a little eye opening for me that it's IO for 10 years, and then it's 30 year amortizing after that."
A concern for him is the secondary market exit strategy for originators of this paper. Depositories are leery of extension risk — mortgages staying on their books longer than planned, and the recent run-up in interest rates has increased the duration on their recent 30-year production as it, Toohig noted.
The other option is selling to aggregators for possible securitization. Lacking those choices, originations of this product, even though it does give loan officers another tool to sell in a rising rate and home price environment, are unlikely to be substantial.
"So I can't imagine there's going to be a lot of volume until [originators] see a reliable exit," Toohig said.
Deephaven has actually offered a 40-year mortgage with a 10-year IO feature for several years now, said Mack Walker, senior vice president, director of capital markets, in an interview.
It can securitize the loan through its existing shelf registration, or they can also be sold to held-to-maturity vehicles.
While it has not had significant volume, at the same time, originations have been consistent since introducing the loan, Walker said, noting Deephaven provides these loans through both its correspondent and wholesale channels. It originates these mortgages across all borrower types, including for owner-occupied properties.
"The borrower base leveraging this option are in higher cost MSAs — sophisticated borrowers typically leveraging this to help manage their month-to-month cash flow — given the IO helps minimize the debt service on their, typically, primary residence," said Walker.
Leading up to the financial crisis, lenders had loose underwriting criteria for loans with IO features like pay-option adjustable-rate mortgages, qualifying the borrower on the lowest possible payment.
"I think one of the biggest changes with respect to IO loans is how they're underwritten today versus historical standards," Walker said. "So borrowers are qualified off of the fully amortized payment, not just the IO payment."
So now the standards are certainly more conservative and level the playing field whether the borrower decides to leverage the IO feature or take out a fully amortized loan, Walker said.
That has helped to ensure consistent performance, consistent with Deephaven's broader production, he continued. Practically all of the production in the past couple of years for the 40-year product has been fixed rate.
