Last week I suggested that the standard mortgage was difficult for many borrowers to manage because of its rigid payment obligation, the fixed payment period and payment amount, and the high cost of building a payment reserve. This article introduces what I will call the manageable mortgage which has none of these problems. It would give borrowers the leeway to integrate the management of their mortgage into their lifestyle and budgetary practices, without weakening the discipline that many borrowers require.
HOW MANAGEABLE MORTGAGE WOULD WORKInterest and payments:
Payments could be made on any day for any amount. Since interest accrues daily, there is no need to partition payments into interest and principal components. Payments go entirely to principal.The borrower’s obligation:
So long as the loan balance is below the maximum balance, the borrower is OK. It doesn’t matter how the balance was reduced to its current level. It is up to the borrower to determine when payments are made and how large they are.
The technique of defining the borrower’s obligation in terms of the balance rather than the payment has also been used before, notably by CMG, which created such a mortgage before to the financial crisis.Contract violation:
To minimize disruption to existing systems, a delinquency could be defined as an excess balance exceeding 30 days, while a default would be an excess exceeding 90 days.Amortization schedules:
However the schedule of maximum balances is defined, borrowers would be provided with amortization schedules based on their own payment preferences. If they wanted to pay biweekly, for example, they would receive a biweekly payment amortization schedule.Use of the Internet:
Borrowers would also be offered easy simulation capacity so they can play “what ifs” with regard to future payments. They would be able to specify future payments in a variety of ways, and in each case trace the effect on the balance versus the maximum balance. In this way, the manageable mortgage could become the core of the intelligent household’s financial planning.
ELIMINATING RIGIDITIES OF THE STANDARD MORTGAGE
The Manageable Mortgage would eliminate the rigidities of the standard mortgage.