Amazingly, there is still a lot of interest about MTA loans. These loans are usually one-month adjustable rate mortgages based on the MTA index (an index based on a 12 month average of actively traded treasury securities). These loans give customers the “option” (very big air-quotes) of paying a minimum payment, an interest-only payment, or a principle and interest payment. In cases where the minimum payment does not cover the interest for the month, the interest is added back to the loan amount creating a negative amortizing loan. Negative AM sounds so harsh and ugly, though, huh? So, mortgage brokers and investors call these loan Pay-Select loans or Pay-Flex loans, as if to say, “Sure, pay what you want . . . you choose . . . really, we’re fine either way, no big.”
To read my previous post on MTA loans, click here.
The reason that I am writing on this again is twofold:
One, the number one search terms that land people on ‘the Mortgage Blog’ are searches for MTA, or MTA loan or MTA index.
Two, I finally found out the truth about this loan.
Here is the thing . . . there are companies (wholesale investors as well as retail mortgage brokers) that sell the heck out of this loan. There is one company who claimed to have 80% of their mortgages originated into this product. Although they have boasted of increased buying power, consumer flexibility and wiser cash-flow management, I have always (for good reason) been suspicious.
My simple question . . . why would a consumer take on a one-month adjustable rate mortgage that is not nearly as good as what they could get in a 5 year interest-only ARM?
Here is the math: the MTA index currently sits at 4.933. If you were take an MTA loan today, the start rate would be 1%. After the first month, the interest rate would adjust based on the MTA index and the margin. For this example, lets say the margin is a friendly 2.5% (accepting a higher margin = more commission for the loan originator). Fast-forward 30 days, and now your interest rate has gone up to 4.933 + 2.5% = 7.433%. So why the 1% start rate? Well, your ‘minimum payment’ (which may not be enough to cover the interest) is based off of your start rate and is usually guaranteed to go up no more than x% per year. And, for your first payment, in the example above, the minimum payment will come no-where-close to paying for the interest at 7.433%, and the difference will be added to your loan balance. Ouch.
So my question has always been, why not take a 5 year interest-only ARM at 5.75% (based on today’s rates)??
And, until a few days ago, I have NEVER been able to get a straight answer.
I was talking with a new wholesale lender account rep (they call on mortgage brokers like me, hoping that I will send loans to them for underwriting, funding, etc). He told me that their MTA loan was by far the most popular product that they were closing . . . like hot-cakes. So, I asked him the same question that I ask everyone who mentions that loan to me . . . “Why wouldn’t I sell the customer a 5 year interest-only ARM instead? Why is the MTA loan better than a 5/1 ARM? Can you even tell me one situation where an MTA loan would be better than any interest-only type mortgage?”
“Well Jeffrey,” he said, “I guess it’s the perfect loan for the customer who wants to buy more house than they can afford.”
And he’s right. Lasso of truth will get you every time.