Loss leader mortgage loan?

If the preferred method of many mortgage originators during the housing boom was to fire and forget -- fund loans, unload them on Wall Street, and go fund some more loans -- Bank of America is trying a different approach with a no-fee loan it will hold in its portfolio as part of a long-term customer relationship building strategy.

BofA's "No Fee Mortgage PLUS" loan not only covers a bunch of lender fees for borrowers, but lets them make a down payment as small as 5 percent without having to purchase private mortgage insurance. It's not clear if BofA plans to recoup these expenses (and more) by charging a higher interest rate (see Inman News story).

In a conference call with reporters today, BofA execs anticipated the "How can you afford to do this?" line of questioning. They said the bank can offer the loan at "competitive rates" because BofA will achieve economy of scale in making many loans. Because it doesn't have to securitize and sell the loans to investors who demand high returns, BofA has more leeway to price them as it sees fit.

Holding and servicing these loans, BofA executives said, will help the bank build long-term relationships with borrowers they can sell other products to (like a checking account, credit card, or investment services). You have to be a bank customer to qualify for a loan, and although BofA says half of us are already are, the program should generate some additional business for the bank right out of the gate

This may not be a strategy that every lender can employ, but it's likely anyone who provides banking services will be following BofA's experiment with interest.

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