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Homeowners could save thousands of dollars on mortgage interest payments if they give up a big incentive: the right to refinance.
That is the conclusion reached by a number of housing professionals, many of whom have seen profits squeezed and portfolios battered because the mortgage refinancing wave, driven by historically low interest rates, has overwhelmed the industry. And to make their point they are funding a study on how to create a nonrefinanceable loan. In the last year, record low interest rates have fueled demand for refinancing as homeowners rushed to cut their monthly borrowing costs. While borrowers save money by cutting borrowing costs, the wave of refinances hurt the housing finance industry's key source of profit - the servicing of home loans. Mortgage loan servicing involves the monthly collection of home loan payments.
At the same time, investors buying bonds backed by mortgage loans have been hurt by the refinances because they bring about a prepayment of their mortgage bonds, hurting their portfolios' rates of return.
"We are paying for it now," David Olson, president of Columbia, Md.-based Wholesale Access said of a borrower's right to refinance. According to Olson, whose firm is conducting the study, borrowers pay between half a percent to a full percent more in monthly interest rates for that right to refinance.
If nonrefinanceable mortgage loans were introduced, they would not entirely replace refinanceable loans, said Olson, who hopes to have his study ready by next summer. "Anyone willing to accept the refi penalty could get a much lower rate," said Olson, adding that some adjustable rate loans offer borrowers the ability to get lower borrowing rates if they surrender their right to refinance.
Wholesale Access' study will examine how effective a nonrefinanceable mortgage will be for lenders and whether it will be embraced by borrowers and investors who buy mortgage bonds.
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