What are the differences between a Mana Loan and a standard mortgage loan?

There are five significant differences. With the Mana Loan:

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Why are there two different insurance policies involved?

The Mana loan uses both an annuity and a universal life insurance policy. The annuity is purchased with a portion of the loan funds to pay the premiums on the Universal life policy. Therefore, the homeowner does not need to pay any insurance premiums other than those from the loan proceeds. There is an immediate cash value from the policy that benefits both the homeowner and the lender. 

In addition, the homeowner will receive tax-favorable policy distributions during the contract owner's lifetime and the program has been structured to avoid any additional taxation.

How does the insurance coverage affect the lender?

The additional insurance benefits the lender in four ways:

1. Payment protection – if the homeowner cannot make a monthly payment, the servicer has the right to take the payment amount from the cash surrender value of the policy and make the payment on behalf of the homeowner.  With the option of the “Skipped Payments Allowed” for the homeowner the Mana Loan still gives the lender normal principal reduction as opposed to other mortgage programs with a “skipped payments” option that ends up with negative amortization.
2. Shortfall at sale - if the homeowner is facing a cash shortfall to sell the home, there may be sufficient cash surrender value in the insurance policy to make up the difference.
3. Death benefits – the insurance policy has a death benefit equal to the amount of the mortgage loan and the loan would be paid off.
4. Fast equity build-up in insurance policy – due to the accelerated cash influx in a short seven pay period payments on the policy, the cash surrender value builds equity at a very rapid rate.

How does the borrower benefit from this loan program?

The borrower benefits from the Mana Loan in six ways:

1. No down payment.
2. Rapid equity growth - two factors contribute to the more rapid equity growth; the bi-weekly payment schedule and the initial cash infusion to the insurance policy within the first 7 years of the loan.
3. Lower interest expense – due to the bi-weekly payments
4. Portable insurance policy - the homeowner can transfer the policy to their next home and eliminate the down payment.
5. Lender paid MI – the lender pays the MI and the cost is included in the premium interest rate giving the homeowner an increased mortgage interest write-off.
6. “Skipped Payments Allowed” – In case of emergencies the mortgage payment may be taken from the cash surrender value.

Has this type of loan ever been offered before?

Yes. There have been similar loans available. For the last 50 years, the mortgage endowment loan has been available in England. In fact, 60% -80% of all British home loans used a mortgage endowment program. The mortgage endowments worked well as long as interest rates were higher and property values appreciated. It wasn’t until interest rates dropped and property values did not increase that the problems with the British mortgage endowment programs surfaced.

England’s mortgage endowments combine an interest-only mortgage loan with an investment tool that hopefully earns enough cash to payoff the mortgage balance at maturity. As rates fell and home values did not appreciate, homeowners were faced with paying shortfalls when the investment tool did not provide sufficient funds for the payoff. 

In turn, the homeowners started cashing in the investments and did not apply the cash to the mortgage balance. Mayhem erupted in England. 

The pitfalls were:

1. Interest only mortgages loans.
2. Lenders did not take the investment tools as collateral.
3. The sole purpose of the investment tool was to pay off the home loan.
4. The lenders were banking on home appreciation.

The Mana loan is structured differently:

1. The Mana loan has principal reductions with a bi-weekly payment thereby building equity faster.
2. The investor takes both the annuity and insurance policy as collateral. The investor has a secure alternate payment source from the policy’s cash surrender value if the homeowner cannot make the payments. 
3. The focus of the insurance policy is not to pay off the home (although that is an option) but to build a savings fund that protects the lender and homeowner. If the insurance funds are never needed during the loan term, the homeowner can enjoy the cash value when the mortgage is paid off.
4. Under the bi-weekly payment plan, the principal balance is reduced at a faster rate thereby reducing the lender’s reliance on home appreciation to cover any shortfalls at the time the home is sold.

How does the MI coverage fit into the loan?

The lender pays the MI in return for an interest rate premium. This  “lender-paid mortgage insurance” does not therefore need to be dropped during the life of the loan.  Secondly, the homeowner realizes a greater tax write off due to paying interest rather than MI.

How would the lender be affected if the loan pays off in the first few years?

The Mana loan encourages the homeowner to stay with the lender or servicer. The homeowner has an incentive to transfer the policy to the next home purchase rather than pay it off.

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How would the borrower be affected by selling or refinancing the loan during the first few years? 

As with any home purchase, selling the home in the first few years is detrimental to the homeowner unless there has been substantial appreciation. The Mana loan performs most effectively after the first few years when the refinances and foreclosures occur.

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How would the loan perform in an area of declining values or during a period of declining interest rates?

1. Declining values: It depends on how many years the homeowner has had the Mana loan. Around the fourth and fifth year, the Mana loan has built up enough equity to be able to contribute to shortfalls if property values drop. By the eighth year, the Mana loan can contribute a substantial amount towards any shortfalls that the homeowner may run into, thus preventing the homeowner from handing back the keys.  
2. Declining Interest rates: The Mana loan works if interest rates are high or low. The lower rate obviously means a lower payment for the homeowner but on the flip side, the higher rate means a greater principal reduction thus building equity faster.

How would the loan documents differ from standard loan documents?

The (bi-weekly payment) note and security instrument differ only slightly, if at all, from the Fannie Mae/Freddie Mac uniform instruments. They reflect the fact that the loan is secured by not only the real estate but also the insurance products.  Therefore, the standard package includes two extra documents creating these additional security interests:  (1) Assignment of Life Insurance Policy as Collateral (which places a lien on the insurance policy); and (2) Security Agreement (which places a lien on the annuity contract). The bi-weekly payment rider, also modified slightly to contemplate the cross-collateralization feature, is included. Finally, there is a master Mana Loan Agreement as a standard part of the loan package.

Any additional required disclosures are included in the standard package. At the federal level, a different disclosure is required when there is lender-paid mortgage insurance (LPMI) instead of the usual borrower-paid private mortgage insurance disclosure required by the Homeownership Protection Act, and this LPMI disclosure is a part of the standard package.

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Why would the borrower be willing to pay an interest premium for this loan?

This product appeals to the homebuyer who has few cash reserves but sufficient income. As a result, the borrower will make a higher monthly payment to compensate for the lack of a down payment. Also the growth in cash value of the insurance is substantial enough to entice homebuyers to use the Mana Loan. 

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Would we have to have licensed insurance agents to make this loan or how would the life insurance be sold?

A licensed insurance agent still would be required in virtually all states, but the Mana product does not intend that the lender must fill this role. Because the life insurance policy and annuity contract are insurance products, most states would require a license to issue them. The Mana product intends to make use of a particular insurance provider, because of Mana’s LLC confidence in its performance, and an authorized issuing agent would be readily available. The lender would not be required to act as the issuing agent.

Would this loan fall under any of the predatory lending guidelines or restrictions?

Generally, the Mana Loan’s unique features would not trigger predatory lending  laws. One possible concern would be that the life insurance policy may be regarded as “single premium” credit insurance, which many predatory lending laws prohibit in connection with “covered loans” or “high-cost home loans.”  Nevertheless, unless the pricing is set high enough to exceed the predatory thresholds, the Mana loan would not be a “covered” loan, so such restrictions would not apply. In any case, where a PL law’s thresholds are triggered, the loan would be “covered” for that reason, rather than because it is a Mana loan.  No known predatory lending law at this time applies to loans due to the features that are unique to the Mana loan, i.e., the use of cross-collateralization of the insurance products.

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Are there any other legal issues that would be different on this loan?

Because the loan is cross-collateralized, the remedies in default consist of not only foreclosure on the real estate but the ability to collect against the security interests in the insurance products. Also, instead of accelerating and foreclosing, the servicer may collect payments by drawing on the insurance policy’s cash surrender value to cover the missed payments temporarily.

The major federal disclosures (and likely any similar state disclosures) should reflect the entire loan amount, not just the portion secured by the real estate. Truth in Lending calculations should be done accordingly, and the Good Faith Estimate (GFE) of settlement costs and HUD-1 Settlement Statement required by the Real Estate Settlement Procedures Act (RESPA) should identify the issuer(s) of the insurance products by name, with the amount(s) paid listed as a settlement cost. Also, as it is expected that a specific insurance provider would be used for the annuity and life insurance policy, the GFE should identify it as a “required settlement service provider,” as required by RESPA’s Regulation X.

Are there any tax considerations to consider for the borrower or the lender?

As noted in the appropriate LPMI disclosure, a borrower may receive a tax benefit from LPMI, resulting from the tax-deductibility of mortgage interest. Although ordinary mortgage insurance premiums are not tax deductible, the interest premium paid in lieu thereof in the case of LPMI generally is deductible if the borrower itemizes.

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Would there be any additional servicing requirements to manage the loan?

Ordinarily, while a Mana loan remains current, there would be none. But see the discussion of default treatment, above.

MANA COMPANY, LLC
P.O. Box 20595
Seattle WA 98102

Evelyn Nichols
1-800-506-7563