Newport Company’s Mortgage Loan Creation Merges Two Approaches

A new mortgage loan on the market merges the traditional fixed-rate loan--still popular among home buyers--with the upstart adjustable rate loan--a favorite of lenders.

Shearson Lehman Mortgage Co., which invented the new loan, is predicting that it will revolutionize the mortgage banking field--and bring in more revenues for the growing Newport Beach firm.

The mortgage, which the company calls a “reduction option loan,” is a typical, 30-year fixed-rate loan that gives the borrower a one-time opportunity to take advantage of lower interest rates during the second, third, fourth and fifth years of the mortgage. If rates drop at least two percentage points during the period, borrowers can get the lower rate without incurring the typically large refinancing fees.

To exercise the option, the borrower also has to pay an option fee of 0.25% of the remaining balance and a $100 processing fee.

“The reduction option will most likely be exercised when the borrower would otherwise refinance the loan to take advantage of lower interest rates,” said Graham Williams, a senior executive vice president at Shearson Lehman. “With a reduction option loan, the borrower can refinance at greater convenience with less expense and risk.”

The new loan also benefits mortgage lenders and loan servicers such as Shearson Lehman. It is a unique product that the company expects the public to gobble up. And it should cut down on typical refinancings that replace the original loans with new loans, which, in turn, eliminate a servicing company’s fees for collecting the original loan.

Because mortgage companies typically package the loans they make and sell them in the secondary market, Shearson Lehman Mortgage reached an agreement with one of the primary buyers of loans, the Federal Home Loan Mortgage Corp., also known as Freddie Mac. Under the agreement, Freddie Mac will purchase up to $1 billion worth of reduction option loans.