Property ManagementFreddie Mac"s "Modifiable Mortgage" Could be The Rage The Next Time Interest Rates Drop
Don"t refinance your home mortgage--with all the attendant hassles and closing fees. Instead, “modify” it at minimal cost.
That is likely to be the message from lenders to their homeowning customers, if a new concept just introduced by mortgage investor Freddie Mac catches fire.
Freddie, the nation"s second largest source of home loan money, is offering the plan as a money-saving option for loans it purchases from some mortgage originators. Freddie buys billions of dollars worth of new mortgages every month. It then pools those loans into bond-like securities for sale to private investors.
The new “modifiable mortgage” concept is intended to discourage the waves of refinancings that lenders--and Freddie Mac--have experienced in the past year. Refinancings disrupt the payment streams of mortgage securities becuse they represent early payoffs or terminations of the loans underpinning the securities.
Large mortgage servicers dislike mass refinancings because they lose the monthly revenues they would otherwise receive for administering mortgaes on behalf of the actual owner--in this case, Freddie Mac.
As a defensive measure against future refi waves, Freddie has begun offering lenders the option to modify the terms of borrowers" mortgages, without actually creating new notes.
Here"s how it works: Say you have a 7 1/2 percent loan, serviced by a lender on behalf of Freddie Mac. You notice that rates have fallen to 6 1/2 percent, and you call the lender with the bad news that you"re thinking of paying off the mortgage and refinancing with some other lender.
Hold it! says the lender. Rather than go to the expense of a refi, why not “modify” your note and stick with us? the lender asks. With a modification, you don"t have to extinguish the legally-recorded mortgage secured by your home. And especially important for you as a consumer, you won"t have to worry about the following standard refi hassles:
Shopping and applying for a new loan from a new lender;
Paying for a new appraisal;
Paying hundreds or even thousands of dollars for a new title search, title insurance, escrow services, transfer taxes, legal fees, recordation charges, flood certifications, etc. etc.
Going through the whole settlement process--from gettng “good faith estimates” from a lender then having to hope that your final “HUD-1” settlement sheet isn"t loaded with unexpected, last-minute fees.
With a loan modification plan, you can simply lower your rate and monthly payment--say from 7 1/2 percent to 6 3/4 percent on the rate--and you get lower monthly payments with minimal paperwork and expense.
Sound good? Freddie Mac is banking on the expectation that you"ll think it is. To support the plan, the giant investor is creating a new category of Wall Street mortgage securities pools that carry the “modifiable” loan feature. When a modifiable mortgage has its rate lowered at the borrower"s request, there is no early payoff, no switch of mortgage servicing, no disruption of the loan pool.
It"s a win-win-win, say Freddie Mac executives. Consumer save money and lower their rates, the servicer avoids a termination of revenue flow, and Freddie Mac"s bonds go undisturbed. Servicers retain their customer base, and better yet, offer an innovative, pro-consumer product option whenever rates drop.
The modifiable program is only available on conventional fixed-rate mortgages up to $275,000; it is not available on adjustable-rate loans or balloon-payment mortgages.