I got David Miles on the phone today and he sent me a picture. Here is the real David Miles, chief U.K. economist of Morgan Stanley. As you can see, he is less insane-looking than the David Miles I pictured in my last post:
Miles has an idea for a new kind of mortgage that sounds very smart to me, even though he says it's "nothing specially, really."
He mentioned his mortgage concept last year in a on the British mortgage market that he did for Her Majesty's Treasury. (Go to page 73, fixed-rate mortgages with stepped-up repayment schedules).
Here's his idea: A safe, fixed-rate mortgage that competes with risky adjustable-rate mortgages by offering a low initial payment. Payments go up over time, as they do with an ARM. But the payment schedule is spelled out in advance, unlike with an ARM, where you never know what's coming.
The reason payments start out low and rise over time is that in the beginning, the mortgage is interest-only. No payments of principal. As the years go by, payments rise gradually because more principal gets paid off. It fully amortizes in, say, 25 or 30 years.
There have been fixed-rate loans in the past with low starting payments, but they often involved negative amortization--the initial payments weren't even enough to cover all the interest, let alone any principal. Payments eventually had to jump a lot to pay off the back interest that got rolled into the loan. Miles says that with today's low interest rates, lenders could offer quite low initial rates even without dipping into neg am.
Here's what Miles told me:
The way the world is in the UK right now, if you're just desperate to get the lowest payment up front, you're going to be pushed toward a variable rate mortgage. You're having to then take on the uncertainty about what future payments will be.
Very cautious people might quibble that Miles's loan would be dangerous for borrowers who can't handle rising payments. But it's a lot safer than most ARMs, with which it would compete.
Is anyone already offering this kind of loan? If not, why not?