Biweekly mortgages, avoided by lenders because of administrative problems in collecting payments every other week, will become more manageable and accessible under a new program of the Federal National Mortgage Association.
The Washington-based association, nicknamed Fannie Mae, said last week it would begin purchasing biweekly mortgages from lenders and placing them in its portfolio. Fannie Mae will handle the collections by drafting the payments out of the borrower's bank account.
Previously, a few smaller companies have established private conduits for the biweeklies, buying them from lenders and selling them to investors. But with Fannie Mae, the largest investor in residential mortgages in the country, entering the picture, lenders will find a ready market for the loans.
"It adds a lot of luster," said Brenda Wilson, vice president of residential operations for Crestar Mortgage Corp., a Richmond firm that trades in biweekly mortgages.
Rather than the 12 monthly payments made on traditional mortgages, biweekly mortgages are collected in 26 biweekly payments, which means there is the equivalent of one "extra" payment each year. Each payment is equal to half of what the monthly payment would be on a traditional 30-year, fixed-rate loan.
"Because there are additional payments each year on this mortgage, the payoff is 20.5 years," compared with a 30-year, fixed-rate loan, said Roger E. Birk, president of Fannie Mae. Birk's prepared remarks were released at the National Association of Home Builders convention in Dallas.
Fannie Mae has made provisions for delinquencies: When there are three consecutive late payments, the loan converts to a 30-year, fixed-rate mortgage, paid off monthly.
"If the borrower can't handle the extra payment, then we don't want them to get into trouble," said Beth Marcus, director of product management for Fannie Mae. "It's in no one's interest for the buyer to go into default."
Fannie Mae begins purchasing the loans on Feb. 1, through its regional offices. It will buy 30-year biweeklies, as well as shorter-term, 15-year and 20-year biweekly mortgages.
Biweekly mortgages may not be for everyone, said one lawyer who represents Dallas-area lenders and others in real estate-related businesses.
"A mortgage is the only tax shelter most people have," said attorney Mark Magilow. "If I had bills to pay and only a certain number of dollars, I want to pay the ones that don't give me a tax deduction ... like Visa, or MasterCard. ... I would want to deduct every penny I could over the life of the mortgage."
Also, Magilow said, a homeowner might want to hang onto the tax shelter as long as possible, rather than shortening the payoff time.
"What we see is people with good financial means, older people who are more interested in the shorter-term biweeklies," said Jim Reynolds, an executive with Ramapo Financial Corp. of Wayne, N.J. "With Fannie Mae coming in, it will open biweeklies up to more people."