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YOUR MORTGAGE : ARM Still Going Strong but SAM Never Made It


When the first adjustable-rate mortgage was introduced more than a decade ago, many financial experts said the concept would never catch on with borrowers.

Time, of course, has proven the naysayers wrong: About 20% of all mortgages being made today carry an adjustable rate, and at times ARMs have accounted for more than half of all loans made in a given year.

But other types of new mortgages--or, as bankers say, "loan products"--that have been introduced in the past haven't proven nearly as popular.

"SAMs," "stables," 40-year loans and "portable" mortgages are just a few of the offbeat products lenders have introduced with much fanfare over the years, only to be greeted with a yawn from the borrowing public.

"You can do all your homework and spend millions in research and advertising, and still wind up with a loser," said Brad Rodman of the Financial Institutions Marketing Assn., a Chicago-based trade group that represents marketing experts.

New types of loans can fail to "catch on" with borrowers for a variety of reasons. Often, it's simply a matter of bad luck or poor timing.

One loan that fell victim to changes in the housing market is the "shared-appreciation" mortgage, or SAM.

SAMs usually took one of two forms. In one type of arrangement, the lender would offer the borrower a cut-rate loan in exchange for a share of the profits when the home was sold.

In the other, a buyer would enter into a deal with a private investor who would provide part of the down payment and share in the resale profits.

The loans enjoyed a short run of popularity in the late 1970s and made a brief comeback in the mid-'80s, when home prices were soaring.

"Then the bottom dropped out of the housing market and SAMs disappeared," said Paul Havemann of HSH Associates, a New Jersey-based firm that tracks lending trends and mortgage rates.

"The lenders wound up getting stuck--they had their cash tied up in property that couldn't be easily sold and, even worse, was probably going down in value every year."

Another loan that never really caught on with the public is the 40-year mortgage.

Lending giant Home Savings of America made headlines a few years ago when it began offering 40-year pay-back schedules.

The loans were expected to be especially popular in high-cost housing states such as California because the longer repayment plan makes monthly payments lower.

But the extra 10 years can add 30% or even 40% more in finance charges over the life of the loan because nearly all of the monthly payment in the first 20 years or so goes toward interest instead of principal.

Home Savings still offers 40-year loans, but a spokeswoman said they accounted for only about 13% of its total mortgage business last year.

"I think a lot of people saw how much more interest they'd pay over that extra 10 years and said, 'I need a loan, but I don't need one that bad," said Earl Peattie, publisher of Home Mortgage Guide, a Santa Ana-based newsletter that tracks weekly changes in rates offered by 140 California lenders.

The "portable" mortgage is another experiment that some lenders would like to forget.

The concept was simple. A borrower would take out a mortgage and, when he eventually resold the house, could transfer the original loan to help finance the purchase of a new home--keeping loan fees and paper work to a minimum.

But portable loans had two fatal flaws, Havemann said. First, rates on the loans were a bit higher than rates on conventional mortgages, in part because lenders wanted to reduce their chances of losing money if interest rates skyrocketed in the future.

The second drawback: Borrowers usually weren't allowed to "reuse" the loan if they sold their original house and moved to an area where the lender didn't do business.

"A lot of buyers said to their lenders, 'Why should I pay a higher interest rate now when I can't use the loan again if I move to someplace where you ain't? ' " Havemann explained.

Borrowers have also stayed away in droves from the "stable mortgage," which was introduced a little more than a year ago by GE Mortgage Capital Corp. and the Federal National Mortgage Assn.

Stables are a hybrid of a fixed-rate loan and an ARM: The interest rate on part of the loan balance is fixed for 30 years, while the rate on the remainder is subject to an adjustable rate.

While this type of arrangement may sound odd, the stable mortgage has its merits. The interest rate on the ARM portion of the loan is lower than the rate on the fixed-rate amount, resulting in a "blended rate" that's lower than rates on standard fixed mortgages.

Only a few lenders across the nation are making stable mortgages, as opposed to the thousands that offer other loans approved by Fannie Mae.

A spokesman for the agency said one reason stables haven't become more widely accepted is that they were introduced, literally, the day before the Gulf War broke out in January, 1991.

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