Despite criticism that the portable mortgage product, which was recently introduced by E*TRADE Mortgage Corp., would have difficulty developing enough supply going forward, executives at the company believe that as lenders learn about this new offering, there could even be enough liquidity so that a secondary market is developed for the product.
"We looked at market conditions and the fact that we are at a 50-year low in rates," said Robert Bernabe, head of retail mortgage lending at E*TRADE Financial. "This product takes advantage of market conditions and is passing the benefits along to the customer."
He added that his company brought the idea to the market with the intention of putting it into its portfolio. But there has been some interest in portable mortgages, and he believes that liquidity could be created even with about 10 to15 lenders offering the product. There is even word that Fannie Mae may be interested in including portable mortgages in its lineup.
Some analysts have said that the biggest obstacle to this product is not the inherent negative convexity - as borrowers could start refinancing portable mortgages as soon as rates dipped enough to offset the rate premium that they have to pay for the product - but rather future supply or the lack of it. They said that in a rate backup, there might be very little demand from homeowners to pay-up for this product, thus making it hard to maintain a liquid secondary market.
"Clearly the secondary market depends upon our volumes and additional people jumping in, but that doesn't mean you can't find liquidity in a number of ways," said Bernabe. For instance, he said that there could be a bank that is interested in buying the loans for a portion of time.
The portable mortgage allows homeowners to have a one-time opportunity to take the mortgage with them when they move. The company takes the remaining balance of the original mortgage and holds the proceeds from the sale of the first property, transferring those proceeds into escrow for the new property. E*TRADE could give a second lien at prevailing first-lien rates of up to 80% LTV. It is like having one mortgage with two different rates that are tied to the first mortgage rates. E*TRADE will not charge any fees for the transfer. However, borrowers would have to pay the usual fees associated with any mortgage such as title and appraisal costs.
The company is only offering the product to purchase money borrowers on mortgages between $66,000 and $1 million. "We are the third largest online lender in the nation, and we have to do all transactions out of one location; and on the purchase money side, we are also competing with traditional service," said Bernabe. "It was important for us to really focus on purchase money and to add a product that could make a statement to the market." Bernabe said offering this product as a refinance vehicle is not out of the question. However, it is dependent on developing a secondary market for portable mortgages.