A push for prepayment penalty legislation got a strong endorsement Sept. 28 when Bank of America, the nation's second largest bank holding company, threw its support behind a proposal to better protect mortgage lenders from losses associated with prepayments.
Although no legislation has been created, Claus Lund, senior vice president of Bank of America's secondary marketing/residential loan division, said that legislation would be introduced in Congress and would impose a penalty on homeowners looking to refinance their homes shortly after origination.
"It's already happening," Lund said after a speech before the Eastern Secondary Mortgage Market Conference in Raleigh, N.C., Sept. 28. He also revealed that Washington lawmakers had already been approached by some California portfolio lenders. He also said that bankers have called for the legislation because the rapid refinancing pace set by a 25-year low in interest rates has made accurately tracking prepayment speeds too difficult, and many lenders are suffering losses as a result.
The proposal, however, may not go far. The House Banking Committee said it hasn't been introduced before the committee and, according to one spokeswoman there, wouldn't gamer much support. The Senate Banking Committee didn't respond to a request for comment.
"[Bankers] are saying We want some protection,'" Lund said. "And an easy way for them to get [it] is through prepayment penalties. A lot of people are going to start asking their legal departments if they can [charge penalties]."
The need for legislation rises from the fact that many states forbid prepayment penalties for many mortgage bankers and investors and the losses have been mounting.
"Some have been so excited that they are losing track of where the risks are--I remember reading Margaretten's description of how well they had hedged," he said, referring to the recent losses written down by Margaretten & Co., the Perth Amboy, N.J., mortgage lender with $1 billion in assets, as a result of losses taken from prepayments on purchased mortgage servicing rights.
The idea of such legislation comes up whenever there's a refi boom, said Sharon Canavan, staff vice president and legislative counsel for the
Mortgage Bankers Association of America. She said that many mortgage bankers who aren't portfolio lenders probably wouldn't support the legislation either. Mortgage brokers will also line up against any legislation cutting into refinances. Most brokers have fared well during the refi boom, and such legislation would lock them out of a portion of their business.
