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E-Trade now offering portable mortgages

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SAN FRANCISCO — Online financial services rebel E-Trade Group Inc. tweaked the mortgage market Monday, offering fixed-rate loans that borrowers can take with them as they change addresses.

The portable mortgages are designed to appeal to people who want to lock in their monthly payments at today's low interest rates, even if they sell their home and buy a new one before the end of the typical loan's 30-year duration.

Getting such a mortgage comes at a price — the interest rate is slightly higher than on a conventional mortgage. E-Trade offered 30-year portable mortgages at 5.875 percent Monday, a hop up from the conventional rate of 5.5 percent.

That premium might be worthwhile if, as some analysts expect, long-term interest rates climb during the next few years.

Typically, a homeowner who sells one home to buy another obtains an entirely new loan to finance the next purchase.

In most instances, the buyer obtains another 30-year loan at a new interest rate, incurring the hefty interest payments usually required during the first few years of a mortgage.

Under E-Trade's program, the 30-year mortgage travels with borrowers from home to home, with the interest rate remaining at the original price. The mortgage can only be transferred once, E-Trade spokeswoman Connie Dotson said late Monday, reversing an earlier statement that there were no limits on the number of times the loan could be moved.

"The concept sounds good, but I want to see how it works in execution," said Paul Havemann, a vice president of HSH Associates, a mortgage research firm in Butler, N.J.

Portable mortgages are common in Ireland and Australia, but have never been a staple in the United States.

But with mortgage rates currently at their lowest in 40 years in this country, Menlo Park-based E-Trade figures now is the ideal time to sell them.

"Our phones are ringing off the hooks," Arlen Gelbard, E-Trade's chief banking officer, said Monday. "We have always been focused on developing products that give our customers different alternatives like this one does."

E-Trade rose to prominence during the late 1990s with an iconoclastic approach that offered discount commissions to individual investors who bought and sold stocks on the Internet.

The stock market's woes of the past three years prompted E-Trade to focus on its online bank, which offers deposit accounts and a variety of loans, including mortgages.

Despite its push into banking, E-Trade remains a small player. The company originated $6.2 billion in mortgages last year — a sliver of the $2.5 trillion market for U.S. home loans.

E-Trade's expansion into portable loans could prod more lenders to experiment with similar products, predicted analyst Justin Hughes of Jefferies & Co.

The concept won't be supported by mortgage brokers, who depend on borrowers repeatedly taking out home loans, Havemann said. Alienating mortgage brokers isn't a concern for E-Trade, though, since it sells products directly to consumers through the Internet, the mail and telephone.

Other lenders have periodically experimented with portable mortgages during the past 15 years, with little success.

What has discouraged them is the lack of a secondary market for portable mortgages. Such a market does exist, of course, for conventional mortgages. It consists of securities resold by mortgage lenders who create them by bundling their loan portfolios.

E-Trade believes a secondary market for portable mortgages eventually will develop, but is prepared to carry all the loans on its balance sheet, Gelbard said.

Portable mortgages offer other advantages besides low interest rates, Gelbard said.

For instance, borrowers with portable mortgages won't have to go through lengthy credit checks or job verifications — although most closing costs will still apply. Having the financing for a purchase already lined up sometimes provides an advantage in the bidding to buy a home.

If a borrower needs additional money to buy the next home, E-Trade said it will finance a second mortgage at the prevailing market rates for first mortgages then. This twist also may offer some savings because first mortgages almost always charge lower interest rates than second mortgages.