SEATTLE-Two credit unions in this region have introduced short-term, limited-fee mortgages designed to capture business from other lenders.
BECU, Tukwila, Wash., has rolled out a 12-year, no-fee mortgage, while a short ride down Interstate 5 in Tumwater, Wash., O Bee Credit Union is offering a 10-year, fixed mortgage with APRs as low as 3.99 APR, also with no fees.
The target for both products is consumers who have low balances on their current mortgages but might be dissuaded from refinancing due to the many fees incurred in a refi.
Bob Stroup, VP of member strategies for $9-billion BECU, said the 12-year, no-fee mortgage product was designed to appeal to a particular niche, "people who don't owe a lot and have not refinanced for a while."
"We tailored it for a low loan-to-value amount," he said. "We wanted something that fits people in their early 50s who want to get their mortgage paid off by their retirement. The average age we've seen is roughly 52 or 53, which is higher than the average age on our other products."
Lee Wojnar, VP of marketing for $136-million O Bee CU, sounded a similar note when he said it is targeting people toward the end of their current mortgage.
"We are looking for people with eight to 10 years left, who want to finish their loan at a cheaper rate," he explained. "The loan cannot be for more than 75% of the value of the house based on the tax assessed value. Most are way under that because the owners have been in mortgages for years. When people are at the end of their loans, they don't refinance because of all the fees they have to pay."
The BECU Product
The BECU 12-year loan is available for a minimum of $35,000 and a maximum of $200,000, with a maximum loan-to-value ratio of 80%, including cash-out. There are no prepayment penalties. It is available to BECU members in Washington, Oregon, California, Arizona, Illinois, Pennsylvania, Kansas and Missouri.
Stroup said response has been "pretty overwhelming," with "a lot of activity" since BECU rolled it out in the beginning of July. The application count for the 12-year loan has quickly surpassed that of BECU's other products, including 30-year fixed mortgages which he said typically are its highest-volume product.
In the first three weeks of August BECU had received 1,100 applications for $175 million in potential refinancings.
"So far we have closed 100 loans for $13 million total," Stroup said. "We are getting interest in the 12-year loan and also other loans because rates are so low. We are trying to staff up to meet the demand, mostly through contract staff."
The 12-year loan is proving popular in no small part due to the fact it carries no fees or closing costs, Stroup said. The only thing BECU collects is prepaid interest.
When management was considering how to price this type of product the original target was a 10-year term. Eventually, Stroup said the credit union decided to go to 12 years because it makes the payment more affordable "and it makes it a unique product."
"We aligned it with the rate we have on our 10-year product with some adjustments," he said. "It is in between the 10-year and 15-year mortgage rates. We priced it so the pricing helps to cover the costs of the fees we are waiving."
BECU foresees interest rates staying "pretty low" for the next 12 to 18 months, he said. The 12-year mortgage is targeting people who don't owe a lot, and the loan amount goes up to just 80 percent, so the feeling is it "attracts people who are a little more conservative and probably represent less risk."
"The Seattle area is relatively healthy, so the problem of risk assessments on comps is lower than many places," he said. "As for interest rate risk, we make sure at the time we price loans we will be able to fund them at a reasonable cost of funds and sell them at a reasonable margin."
Wojnar said O Bee has had a "great response" to the 10-year mortgage, with 20 applications within the first two weeks.
"For those who don't qualify we have other products," he said. "The new mortgage product gets the dialog going with members as to how we can save them money. Even credit cards-we are getting people into a better rate card than they have elsewhere. When you start saving people money, they feel more comfortable with themselves and they have more buying power locally."
O Bee employs an algorithm that helped it price the loan, although Wojnar declined to reveal the specifics. In general, he explained, its ALM modeling says "if we do this we should price that."
"There are multiple factors that go into pricing, starting with the need for sizzle in the market," he said. "We also wanted to help stimulate the local economy. People are trying to save money, so with no fees they can move their mortgage over. Our risk is low because most of the house is paid off. We are good with offering the low rate because we have a program that offsets it, so even if rates go up we are covered."
Still Too Early To Call It Trend
As to the issue of whether the 15-year is replacing the 30 as the consumer choice, Stroup said, "I don't know how much switching is happening yet. Our 15-year and 30-year volumes are still healthy, so their hasn't been a huge dent. Many people are payment driven, so if they can shave off 15 years and make the same payment, they will."
