Thursday, August 2, 2007

New 100-8-20-5 SFM Mortgage Product Pulled From Market Before Launch Date

The Mortgage Bankers Association announced today that it’s much anticipated 100-8-20-5 mortgage product will not be available for sale in late 2007 as planned. The 100-8-20-5 Self Financing Mortgage (SFM) was a whole new class of mortgage product that was designed by the best financial engineers in America.

The basics of the SFM mortgage can be seen in the 100-8-20-5 numbers:
- 100% is paid to the seller for the cost of the property
- 8% is paid in modest administration and origination fees
- 20% is set aside in a new form of financial trust, which would cover at least 36 full months of missed payments by the borrower
- 5% invested in highly leveraged funds expected to make near 100% returns every year

The elegance of this product was that, thanks to the 20% set aside trust, the delinquency rate was guaranteed to be zero in the first few years. Because of the zero delinquency rate, the MBS would likely get an AAA rating by the market. Even after three years of no borrower payments, the expectation was that the highly leveraged 5% investment might have grown to 40% of original property value, and could be used to replenish the set aside trust. This would allow for another 36 or 72 months of nonpayment by the borrower. And so on.

It seems to offer a 133 LTV, but the financial engineering is complicated, and the SFM is said to have complied with all enforced and marketable mortgage standards as of January 1, 2007.

The SFM class was designed to be the successor to all ARMs written between 2004 and 2007, as well as an easy ‘no doc’ upgrade to any troubled subprime, Alt-A or even prime mortgage. What shall become of any troubled 2004-2007 vintage mortgages, now that they will not be able to convert to SFMs, is currently unclear.

Changes in the market and regulatory environment may shelve the SFM for years. There was a more conservative 100-9-30-10 SFM variant that was also put on hold indefinitely.

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