New Loan Considered to Limit Refinancing
U.S. mortgage lenders may introduce a home mortgage that could not be refinanced during the first two years of the loan--an effort to protect a key source of profit for the banking industry.
Executives at an industry conference in Chicago said this week that they believe borrowers could be enticed to take loans with refinancing restrictions in return for lower rates.
Last year, the mortgage banking industry processed $2 trillion in mortgage loans as rates fell to historic lows. More than half of this record business was related to processing loan refinancing applications for homeowners seeking to cut monthly mortgage payments and to squeeze equity out of their home through cash-out refinancings. Some borrowers refinanced their loans three times last year.
This immense volume of business related to refinancings was a source of profit for mortgage lenders, but the business of servicing a pool of loans--the collection of monthly loan payments that is an important source of profit--was tricky. Many loans that were refinanced were sources of profit that servicing companies lost to their competition.
Some lenders are considering creating a type of loan that could not be refinanced for 24 to 30 months, said David Olson, managing director at Wholesale Access, a mortgage research firm.
Although mortgage rates have risen from their historic lows and refinancings have cooled, lenders are looking to protect themselves from future declines in rates because technology has made the refinancing process faster.
“This has been the Achilles’ heel of the market,” said Tom LaMalfa of Wholesale Access.
“Not one lender is against this,” said LaMalfa, who added that this is not a new idea but one that has gained favor in the wake of 2001’s massive refinancing wave.
Also, securities backed by home loans have been prepaid because of refinancings, forcing investors to put their money back to work in a low-rate environment where yields are lower for portfolio managers.
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Refinance Activity
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