What is a Relocation Mortgage (Relo)
Designed explicitly for relocating and transferring employees, the relocation mortgage (Relo), is a type of alternative mortgage product. Corporations take advantage of these loans as part of the signing or employment package for upper-level employees. Relo mortgages make the moving process more comfortable and economical.
BREAKING DOWN Relocation Mortgage (Relo)
Relocation mortgages often involve financial contributions by the employer. These contributions can include subsidies to cover closing costs, interest rate buydowns, and below market interest rates. Relocation mortgage rates may be originated at rates 25- to 50-basis points (BPS) below market interest rates for similar conventional mortgages. One basis point is equal to 1/100th of 1% and reduces the loan's interest rate.
The lender may also provide a dedicated staff of home loan consultants trained to address the needs of transferring employees who are buying or selling a home. This can result in faster and cheaper loan processing.
Employee Moving with Relocation Mortgages
Some data shows that an employee who relocates for their work are likely to transfer repeatedly at predictable time intervals, frequently two or more relocations in five years. An employer is not likely to help with an employee’s relocation unless they anticipate tenure at the new location of a year or longer. So these buyers may be less likely to refinance early in the life of the loan. Also, employer subsidies generally lower the borrower’s monthly payment and reduce the borrower’s sensitivity to rate-related refinancing during the period of the support, which is usually early in the life of the loan.
If interest rates rise, prepayments tend to remain relatively faster after the first one or two years because of the natural cycles of relocation among these borrowers. A decline in interest rates may cause the employer to encourage the employee to refinance the loan through forced refinancing clauses.
Investing in Relocation Mortgage Pools
Fannie Mae offers a relocation mortgage-backed security (MBS). This pool of underlying properties consists entirely of relocation loans. However, relocation loans, along with cooperative share loans and certain buy-down loans, are considered special-feature mortgage loans. As special-feature loans, there are limits on the number of properties that may be in the eligible pools.
Relocation loans also may be included in other pools. If a fixed-rate pool contains more than 10 percent of relocation loans, the pool prefix will identify the pool as a relocation loan pool and the pool statistics portion of the prospectus supplement will show the percentage of relocation loans in the pool.
Any mortgage-backed security pool carries the risk of buyer loan prepayment. The ability to predict this risk is of significant value to traders. Relo mortgages tend to have a more predictable prepayment characteristic which allows relo MBS to trade at a premium. Relocation mortgages have more predictable prepayment risk characteristics than non-relo mortgages. Also, relocation loan MBS historically have prepaid faster than similar conventional products in most interest rate environments and may also protect the investor in rising interest rate environments.