"Has there been any significant change in the interests of your readers since the crisis?"

I recently compared the Web pages that visitors to my website looked at in April, as compared to the pages they accessed in April 2006 just before the crisis.

One of the most popular articles in 2006 was my tutorial on interest-only (IO), a mortgage option that allowed borrowers to avoid paying principal for 10 years. The IO was a popular way to increase the amount of house a buyer could afford — usually against my advice.

A large proportion of those who took IOs earlier now owe more than their houses are worth, and the price increment charged by lenders for the IO option today is much higher than it had been before the crisis. Not as many loan officers and mortgage brokers recommend IOs today, and not many of the visitors to my site today click on the IO pages.

An article that is very popular today, much more so than in 2006, is on "lease-to-own." This is an arrangement under which a home is leased but with an option to buy within some stipulated period.

Home sellers today who are having difficulty selling in a slow market may be interested in lease-to-own as a way of encouraging a future sale, generating rental income while they wait. Would-be home purchasers who have seen their credit scores decline because of payment problems or who can’t meet the higher credit scores and downpayments required today are attracted to lease-to-own as a possible avenue to homeownership. The subprime alternative route has been closed and will stay closed indefinitely.

In a major shift in reader interest, one of the 45 calculators on my site drew more users in April than any article, and 10 times as many as in April 2006. This was the "Extra Payments" calculator number 2a, which will recalculate an amortization schedule for any configuration of extra payments the user wants to try. The current market has generated multiple uses for this calculator.

Investment planning: Many mortgage borrowers have come to realize that paying down their loan balance is the only riskless investment available today that yields more than 1-2 percent. Extra payments are an investment that yields the mortgage rate compounded monthly, with no default risk. Calculator 2a allows borrowers to try out various strategies for accelerating the paydown of their balance.

Not all borrowers see this — I still receive letters asking whether or not they can pay down their mortgage faster by putting the extra payments in the bank. The answer is "no." If your mortgage rate is 6 percent, a bank would have to pay you 0.5 percent a month to match the savings derived from paying down the balance.

Removing mortgage insurance: Price depreciation over the last three years has reduced homebuyer equity — property value less loan balance. Among other things, this delays the termination of mortgage insurance (MI), unless the borrower rebuilds equity by making extra payments. Equity lost through price depreciation can be rebuilt through balance reduction. Calculator 2a allows borrowers to find an affordable pattern of extra payments that over some period will reduce the balance to the level needed to terminate MI.

Obtaining the best price on a refinance: The financial crisis has made mortgage refinancing more attractive by reducing interest rates on prime mortgage transactions. At the same time, equity depletion has converted many transactions that would have been prime before the crisis, into less than prime. Further, the larger risk premiums demanded by lenders has increased the price differences between prime loans and those less than prime.

A transaction that is less than prime because of insufficient equity can always be made prime by some reduction in the loan balance. Calculator 2a allows borrowers to develop an extra payments plan that reduces the balance to the level needed to make the refinance a prime transaction.

Converting jumbo to non-jumbo: Another consequence of the financial crisis has been to increase the price difference between standard conforming loans that can be purchased by Fannie Mae and Freddie Mac, which cannot exceed $417,000, and loans that exceed that amount, called nonconforming jumbos. In addition, with conforming size limits temporarily increased up to $729,750, depending on the area, we have conforming jumbos, which are priced higher than conforming standard.

Refinancing borrowers with balances only moderately above either the conforming standard maximum or the conforming jumbo maximum have a strong financial incentive to pay down the balance to those amounts before refinancing. Calculator 2a can be used to plan the paydown strategy.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.


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