Real Estate Today
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Some mortgage industry analysts have dubbed the new automatic rate reduction loan product as the most revolutionary concept offered to homebuyers since the adjustable-rate mortgage was introduced in the 1970's. |
ARRs are being marketed primarily by small lenders, and consumers are said to be responding well to the product. Borrowers who sign up for the ARR loan program will have the advantage of being guaranteed that the interest rate on their mortgage loan will never go up but will automatically decline whenever there is a rate drop.
The refinancing will be processed by the lenders free of charge. "If a homeowner calls us, we'll refinance them at no cost because we will pay all closing costs," said Keith Kelly, division manager for Service Savers in Fairfax, Va. "The borrower just continues to pay their monthly mortgage. Sometimes, appraisals are required, but we pay for that too." According to Kelly, Service Savers is the national leader in terms of promoting and closing ARR deals. The Savers program is called ARC, which stands for, Automatic Rate Cut, and in the first two weeks of May alone, Kelly said the ARC loan origination volume was more than $9 million. "I love this program because it is the best way for consumers to finance mortgages," Kelly said. The ARR programs being established by small lenders vary concerning their design and eligibility requirements.
At Savers, if a mortgage application is for and FHA or VA loan, no appraisal or credit check will be required and loan officers will just review the borrower's mortgage payment history over the past 12 months. Good credit is a must. The same applies to loans sold to Fannie Mae and Freddie Mac, and additionally, income verifications would not be needed.
"If a loan was not sold to Fannie, we would get two years income verification, one full month of pay stubs, and two months of bank statements on the borrower. We would also run a credit check and do an appraisal, which we would pay for," Kelly said.
Once a borrower has been approved for the Saver's ARC program, after a 120 days, if interest rates have dropped, the borrower would automatically be called and informed that his mortgage loan rate has been lowered. This process will be repeated every 120 days.
However, if rates fall before the 120 days have passed, Kelly said they can do a mortgage rate lock for customers, so that they won't miss out on the better rate in case rates are higher at the end of the 120-day required time period.
"We have to wait 120 days, so we can't close the loan until the 120 days are up, but we can get you locked in to the rate before that time," Kelly said. "Last year, there were so many fluctuations in interest rates and lots of borrowers went through three closings for lower rates at no cost."
One drawback that has been noted about ARR programs that are cropping up across the country is that lenders are usually charging more for these loans than conventional mortgages, and as rates fall, the automatic reduction an ARR borrower receives may not be the best rate in the market.
Kelly admitted that the initial interest rates borrowers receive through their ARC program are 25 basis points higher than conventional mortgage loan rates. However, he noted, "I could, say, offer you an 8 percent loan and XYZ company gives you 7 ¾ percent. With them, you also paid the closing costs. A loan officer will tell a buyer that you'll recoup the difference in an 8 percent and 7 ¾ percent loan in two years. But to see the true savings, you must compare the benefits of no closing costs vs. closing costs."
The issue of how lenders can absorb the closing costs and still make a profit on these loans has been raised. Some lenders have said that they receive discounts on key closing cost items such as appraisals and title fees. Additionally, lenders see the program as a way to instill customer loyalty in borrowers and the more customers they are able to retain, the less runoff they have on their servicing portfolios.
Savers have a program in place that it markets to help them with loan servicing retention. Of the 500 loans they have tracked, Kelly said their retention rate is 90 percent and that they will market ARC to the large lenders as a way to retain servicing.
"Every company that has servicing and does not have an ARC in place, we'll extend this program to them. I don't fear losing business because there's so much out there," Kelly said. "If a loan is held by a large servicer who doesn't offer this program, then they will surely lose borrowers, and most large servicers don't have good retention services in place."
Savers is able to offer its ARC program to borrowers and lenders nationwide because of an alliance agreement the firm has with National City Mortgage, the Miamisburg, Ohio, company that finances Saver's mortgage loans. Even though Savers can operate the program in every state, Kelly said they do not plan to do any business in Florida and New York.
Kelly pointed out, "New York and Florida can't be done because the closing costs there are too high to be profitable."
According to Kelly, the typical borrowers applying for Saver's ARC program are people who want to combine a first and second trust because the second trust has a higher rate. Also interested are people with ARMs who want to get into a fixed rate before their ARM is scheduled to increase.
"Anyone with an ARM is the best candidate for this because you can get out of an ARM into a fixed rate and take advantage of lower rates as it happens. Even if the fixed rate is the same as the ARM, people can benefit by protecting themselves from future increases because, even when rates were low, ARMS still went up due to built-in margins. So, even in low-rate environments, ARMS will go up," Kelly said.
- Gwendolyn Glenn June 7, 1999
Real Estate Finance Today
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