The Next Wave of Actively Managed Debt — The Mortgage.
By: Jeffrey Loyd
Tags: Mortgage, Debt Management, Real Estate, Home Loan

Photo by Startup Stock Photos from Pexels

Originally posted on LinkedIn

There should be a mortgage product that automatically takes advantage of rate declines without refinancing while allocating the housing payment savings to debt repayments in a consumer selectable way.

With current technology, this seems doable. Some apps round up a cup of coffee, depositing the difference into a savings account. Apps will show you the best way to pay off debts and how much should go toward each creditor for maximum impact.

Why isn’t there a mortgage that automatically reduces your rate when rates go down without an expensive refinancing and take the difference of the old payment and the new payment to pay off debts or the mortgage itself?

Such a consumer-friendly mortgage would be a market differentiator.

For years, TransUnion studies consumer debt payment hierarchy. In each of these years, consumers prioritize unsecured debt payments over mortgage payments.

While this sounds bad for the mortgage lender since people pay car loans, personal loans, and credit debt first, it makes sense.

People need their car to get to work.

People need their credit cards for emergency spending.

People need personal loans to consolidate their credit cards, freeing those balances up for an emergency.

Consumer behavior shows they will pay credit cards, personal loans, and auto loans first. Not the mortgage.

Simply stated, the recession has reduced the social stigma associated with foreclosure. There is abundant literature that discusses this change, both scholarly and in more mainstream general media. In fact, the phrase “strategic default” was coined during this past recession to describe the conscious choice of a consumer to default on a mortgage. While we would argue that every default is, in a sense, strategic, the important point here is that it is no longer considered a sign of poor ethics or loose morals to default on a mortgage — on the contrary, in many cases it is seen as a savvy move for managing personal finances. (Komos, Reardon, Wise, & Becker 2012)

What people also know is that it takes months to foreclose on their house. They could be living there for a year without making the payments. They get hungry and need to get to work.

See the difference?

How does this relate to the Debt Buster mortgage?

First off, what is a Debt Buster mortgage? It’s a fixed-rate mortgage for one. When rates decline, the rate on the Debt Buster mortgage declines. The payment remains the same. The difference between the new lower payment, and what is being paid is consumer allocated to paying down debts.

Consumers can select if they want to pay down their mortgage principal or their other debts. Cool right?

This solution puts them ahead of those debts as rates decline, the difference in their housing payments helps them pay down their consumer debts.

One objection I get as I pitch this mortgage product idea around is that the investors who own the loans will be subject to constant prepayment risk. Perhaps not

This mortgage should appeal to investors since they don’t lose the loan every time there is a rate drop. With the automatic rate reduction feature, there is no need to refinance to another mortgage. The income stream, while lessened, continues rolling in.

Active debt management is the next wave.

References:

Komos, Matthew, et al. “https://www.transunion.com/Docs/Rev/Business/Marketperspectives/Small-Business/Payment_Hierarchy_White_Paper.Pdf.” TranUnion, TranUnion, 2012, https://www.transunion.com/docs/rev/business/marketperspectives/small-business/Payment_Hierarchy_White_Paper.pdf.

Sources:

https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2019Q1.pdf

https://www.transunion.com/docs/rev/business/marketperspectives/small-business/Payment_Hierarchy_White_Paper.pdf