If you own a home with a mortgage, do you really need any other source of credit?
Is there any source of spendable cash that carries a lower interest rate and is tax deductible to boot? Could your credit cards, personal loans, investment accounts and banking relationships all be tied into your home mortgage?
The answers to these questions are swirling in the heads of some of the most creative marketers in the mortgage business. Large banks, mortgage companies and investors are working on competing versions of a similar concept.
In the words of Saber Salam, vice president of mortgage investor Freddie Mac, the idea is: "How do we maximize the benefits and uses of a mortgage, making it the centerpiece of a household's financial life?"
One of Freddie Mac's largest partners, Wells Fargo Home Mortgage, quietly has been working on a loan concept called "Single Source" for more than a year. Wells executives decline to discuss the plan because it is in development, but the idea would work something like this: When you obtain a new mortgage, you would simultaneously be given a line of credit equal to the amount of your down payment. You wouldn't apply separately for it, and you wouldn't ever have to use it. It would simply come with your basic loan and be dormant until you activated it.
Once activated, the line could be used for any or all your credit needs, from car purchases to college tuition. Any balance you put on the credit line would carry a low, tax-deductible interest rate. The amount of your available credit line would grow as your home appreciated in value.
Periodically the mortgage company would notify you that based on property value data, your home equity credit availability had increased by a specific dollar amount. You could charge expenses to your credit line up to that new limit. The limit would always be equivalent to your equity in the property, giving you a combined mortgage amount plus credit line availability totaling 100 percent of the value of your home.
Let's say you buy a $250,000 home and put down $25,000. You'd get a $225,000 first mortgage at 7 percent and a built-in credit line of $25,000, ready for activation. A year after closing, you get a letter from the mortgage company: "Dear Borrower, based on our current market value estimates for your property, we are pleased to inform you that your credit limit has been raised to $30,000 from the original $25,000." You'd be free to ignore the credit line or use it to the max. And because of federal tax law, the interest you pay on the activated line would be tax deductible, as long as the total mortgage debt on the house did not exceed the property's full market value.
Financial institutions besides Wells Fargo, including nationally known banks and mortgage companies, are working on this general idea but haven't confirmed it publicly. Some banks internally refer to it as their "current account" mortgage. Financial institutions in the United Kingdom offer versions of the plan, and mortgage market experts say consumers here could see it within the year.
Still another concept American home buyers may see in the months ahead: a major move toward customizing loans aimed at new immigrants and minority renters. Spurred on by President Bush's pledge to turn 5.5-million African-American, Hispanic and immigrant households into homeowners during this decade, mortgage companies and banks are rolling out "cross-cultural" lending campaigns designed to accept nontraditional credit standards for mortgage approvals.
Freddie Mac now offers a home loan tailored to meet the religious dictates of Islam. Freddie Mac and Fannie Mae support national marketing efforts targeted to Spanish-speaking households. Washington Mutual Bank is preparing to introduce a no-down-payment "Community Advantage" loan aimed at new buyers with incomes 80 percent or less of their area median household incomes.
According to Brenda Nettles, senior vice president of credit operations, the program will give immigrants and others with minimal banking histories full credit for rent payments, cell phone bills, utility and retail account payments.
The program will aggressively "reach out to people who normally think they couldn't qualify" for a mortgage to purchase a home, Nettles says. It will recognize nonstandard income sources: part-time jobs, cash-payment jobs and employee assistance.
Wells Fargo Home Mortgage is pushing its zero-down plan for minority and immigrant consumers, dubbed the National Home Ownership Mortgage. Though "not restricted in any way" to minorities, says Jackson Casey, senior vice president, "that is our target." Unlike traditional underwriting, the new zero-down plan counts "secondary incomes received in cash" _ seasonal work income, child care payments, cleaning service income _ to qualify applicants for a mortgage.
Ken Harney's e-mail address is kenharneyaol.com.