Is Merit Refinancing On The Way?

I suspect a number of people share the view that it’s great to help homeowners facing foreclosure, but what about the folks who simply pay their bills? When do the creditworthy get a break for good financial behavior?

“Mortgage borrowers who play by the rules ought to benefit during these tough times,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com. “It makes sense to reward good borrowing with better mortgage terms, to have people see that paying debts and having good credit creates tangible advantages that fatten their wallets.”
One idea that’s been floating around concerns an effort to simply refinance every performing mortgage. Last summer Bill Gross, head of the $239 billion Total Return Fund, suggested that the government should sponsor a massive refinancing of performing mortgages — sort of a TARP plan for homeowners.

The idea is that if we had a broad refinancing to lower rates — including refinancing for people who have been paying their loans — lender risk would decline. There would be fewer foreclosures and fewer foreclosures would help stabilize home prices and maybe — dare one say it — lead to higher values in some areas. Households with lower mortgage costs would have more disposable income and that would be good the economy. Mortgage investors would be fully paid when their loans are refinanced.

The Government’s Role
While a broad national refinancing effort based on merit is a nifty idea it hasn’t been endorsed by the government. In fact, the government has done little if anything to help homeowners who have kept up their payments and not walked away from their homes or mortgages.

Now the idea of a general refinancing based on merit is gaining some traction, not from the government but from the private sector. I know about this because out of the blue, our lender — JPMorgan Chase — just offered to refinance our home and reduce our interest rate.

The proposed reduction would be a little less than a 1 percent. This is a significant decline because our mortgage rate is already low and the proposed refinancing would produce savings of several hundred dollars per month.

It’s not just the lower rate that got my attention. There were other factors as well:

  • No appraisal is required. This is hugely important in areas where home values have declined.
  • All refinancing fees will be paid by the lender. There will be pro-rated costs for property taxes and insurance; however, money in the existing escrow account will be returned.
  • Little documentation is needed — so far there has only been a phone interview lasting a few minutes and the exchange of some e-mail.
  • It’s okay to have a second lien as long as it’s also held by Chase.

Questions
Being cautious, I contacted Chase headquarters (not the number on the letter we received) to ask a few questions — and to assure that the offer was real and not from another company using the Chase name.

If there are few closing costs except for prepaid items such as mortgage interest and taxes, then will my mortgage balance increase to cover the settlement charges Chase is paying?
No.

Is there a prepayment penalty?
No.

Is the replacement loan a plain vanilla, 30-year, fixed-rate mortgage?
Yes.

At this moment I know the question you’re asking: Why on earth would a lender be so generous? Why would a lender propose a lower interest rate? Ever?

Forget about generosity. This is a business deal. A very smart business deal.

Millions of homeowners are simply good borrowers. They make their payments in full and on time. They never miss.

This sounds ideal for lenders and no doubt it is. However, lenders can also make money — a lot of money — refinancing homes, originating fresh loans and then selling them in the secondary market to mortgage investors.

Making this process somewhat easy is the fact that lenders know a lot about us. They know if they get their money every month, they know who has equity and they know that if borrowers paid less each month then there’s less risk. The result is that a new loan at a lower rate to a strong borrower can be sold to mortgage investors for a premium and that premium is where lenders can make money.
You can see what Chase is doing. A quickie computerized search of its borrowers could turn up 50,000 people with excellent payment histories and solid home equity. If a good percentage of these borrowers refinance then Chase can make real money re-selling the loans in the secondary market.

As a borrower do I care that Chase makes a profit? If I was paying too much for my loan, then yes. If I was getting a toxic loan, absolutely. If I was offered a subprime loan and qualified for a lower-cost conventional mortgage, you bet.

But that’s not the case here.

Given today’s rates could I get an even lower rate from a different lender? Perhaps — and that’s an option to always keep open. But in this situation I will instantly save several hundred dollars per month without big costs up front or application hassles.

Loan Acceleration
The savings represented by lower monthly costs can be put to good use such as paying off credit cards and auto debt. Another good use, a very good use, is to prepay the new mortgage.

Let’s say you have a $250,000 loan at 5 percent. The monthly cost for principal and interest will be $1,342

If the loan is refinanced after five years then $228,799 remains on the mortgage. If this amount is refinanced at 4.125 percent then the new expense is $1,109, a monthly savings of $233.

Take that extra $233 and use it each month to pay off the mortgage and the new loan will be fully repaid in 257 months instead of 360 months. In effect you will save 103 payments and have a 21.5 year mortgage.

Chase is not the only lender making such offers. Others have told me that without asking a current lender has just offered to refinance homes at lower rates.

Whatever else is happening in the banking business lower costs for paying homeowners allows both borrowers and lenders to come out ahead — and that’s the way it ought to be. The next question, of course, is which other lenders will follow such examples and help the creditworthy.
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Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.

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