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AIM Off Target
There is so much money in the mortgage pot (two trillion bucks at last count) that there is always somebody new trying to get into the game.
Despite this continuous effort, genuinely new mortgage products are rare. Mortgages are just money, after all. New products are usually reshuffled old products, and sometimes intentional complications (which can be useful to lenders: confused borrowers often make easy victims).
This Fall, consumers are being offered the newest entry: the Asset Integrated Mortgage, "AIM" for short. Its financial objective is a neat idea: earn interest on your down payment -- after you've put down the down payment and bought the house.
(WARNING! Read no further unless you want to dissect the all time champion Rube Goldberg of mortgages. Beware of glazed eyes.)
The AIM is designed for people who intend to put 20% down. This down payment is deployed in a most unusual way. Instead of getting an 80% loan, the buyer gets a 95% loan, and three-quarters of the downstroke (15% of the sales price) is invested for you by the lender.
Alert borrowers will be thinking, "But 95% loans have heavy mortgage insurance cost -- that's why I'm putting 20% down in the first place." Not here. The 15% of sales price is not only invested for you, but pledged to the lender in place of mortgage insurance.
AIM sales materials speak of "putting your down payment to work" in a "guaranteed" investment, "guaranteed" equity buildup (even if the house doesn't increase in value), tax advantages, and -- steady, now -- if you pay off the loan over thirty years, at the end, your investment is worth the entire original loan balance!.
If you buy an AIM-financed $100,000 house (I know there aren't any, but it makes the math easier to follow), you get a loan for $95,000, costing $730 per month for thirty years at 8.50%. The invested part of the down payment, $15,000 earning 6.25% compounded for thirty years, at the end is worthÉ. $97,337. Wait thirty years, and the check is in the mail.
These claims are "true."
However.
There is the relatively small matter of the safety of the "guaranteed" investment, and the larger issue of return on investment.
The AIM investment is chosen by the AIM purveyors, and it is always a "guaranteed" investment contract ("GIC," pronounced "gick" on Wall Street) wrapped in a tax-deferred annuity and sold by an AAA-rated insurance company.
One piece at a time, slower, please.
Insurance companies sell "investment contracts:" you give them money, they pay you interest. If they promise to pay you back, the deal is "guaranteed" -- by the insurance company, nobody else. No deposit insurance, no Treasury or Federal guarantee. The tax deferred annuity (TDA) part is roughly like an IRA or 401k in that your investment earnings are tax-sheltered.
Now, the financial landscape is not exactly littered with defaulting AAA-rated insurance companies, but a recent AAA disaster was Executive Life, seller of many a GIC, and footsie player with Michael Milken, the junk bond king. There is not a lot of risk, but the technically correct use of "guarantee" is a little strong.
The real problem with the AIM is that the investment doesn't pay very well. GICs have a notoriously low return, usually only a hair above Treasurys.
So, why would the AIM purveyors put you in a low-yielding investment? Remember that the investment is pledged to the lender as collateral. An AAA rating keeps the lender happy because it has to keep Fannie Mae happy, and Fannie is happy if its rating agency is happy. Its rating agencies are the same ones which rate the GICs. Nice little club.
Some more AIM math will identify the shell under which lies the very small pea.
The $95,000 AIM loan has a monthly payment $115 higher than the $80,000 loan you would have gotten without AIM help. One of the older questions about investments is "What else could I get for my money?" What investment could I make with the same $115 each month?
If you put $115 per month in a plain vanilla IRA (or 401k, or Keogh, or other tax sheltered account) and earned 10% per year for thirty years, you would have $259,956 in the account at the end.
How am I going to earn 10% per year? Well, a licensed investment pro might tell you that it's hard for a diversified bunch of mutual funds not to earn 10% per year over the long run. That's certainly what the insurance company selling the GIC intends to do: borrow from you, invest, and earn more than they pay you. For that matter, an insurance company is just a big load of diversified investments. Why pay the middle man?
Still think 10% is too high? Try 8%. Thirty years later, you've got $171,391. How about the same 6.25% as the GIC? $121,200.
The shell with the big pea under it is the one marked "disciplined monthly savings," and you don't need some mortgage and investment garble to get that job done.
Note: I've simplified (honest!) the investment and tax issues here. My investment example is not quite the same as the AIM TDA, and no one should take this as investment or tax advice. However, your CPA or financial planner should find this analysis useful in decoding the AIM.
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