With mortgage interest rates hovering above historic lows and competition fierce, home lenders are scratching and clawing for every loan they can close.
To wit: A Boston bank recently publicized its "Waive Home Loan Program." OneUnited Bank is offering to waive fees for appraisals, credit reports, loan origination, processing, underwriting, loan documents, document review, tax transcripts, tax service, flood certification or flood monitoring for applications received in 2014 to purchase or refinance a single-family home in the $616 million-asset bank's lending areas of Boston, Los Angeles and Miami.
Credit Union Journal asked several CU mortgage lenders to evaluate the program, weighing the advantages and disadvantages.
Christine Busheme, vice president of mortgage lending for $1.6 billion Fairwinds Credit Union in Orlando, Fla., said OneUnited Bank's promotion is emblematic of the current state of the mortgage market.
"As lenders, we used to be able to compete on rate," Busheme said. "We are no longer able to do that because margins are squeezed so skinny most of us are grossing just 1% above par."
Some mortgage lenders are starting to compete on closing times, according to Busheme, with promotions offering to close in 30 days or the consumer gets a benefit, such as $1,000 cash back. Some even claim they can close in 15 days, which she said is difficult for credit unions to compete with.
"What we are seeing now is lenders are forced to sit on the loan and collect on servicing," she said, or they have to get creative.
Fairwinds CU has developed what it calls the "Freedom Mortgage," in which the CU pays the standard closing costs the buyer customarily pays in a purchase transaction. "Freedom" refers to the flexibility for borrowers pick terms of 10, 15 or 20 years.
"We also have a 30-year, no closing costs mortgage that does not have a fancy name," Busheme said. "In all of these cases, the rate is a little bit higher, typically one-quarter to one-half. In some cases we go up to 95% loan-to-value, which makes it an indefinite portfolio loan because we never will be able to sell it to anyone else. If we do the higher LTV that means an additional rate add-on."
All of these variations on the mortgage loan are "innovative ways to compete" in a tough market Busheme explained.
"A mortgage is a mortgage, the process is the process, and the end result is the end result," she said. "Most people are so concerned about getting the loan origination processed, and they don't think about the next 30 years. Even if we sell a loan to Fannie Mae, we keep the servicing. This is a huge benefit that most borrowers overlook. If there is a problem, the loan is serviced right here in Orlando, as compared to a Goliath bank that has a sub-servicer and the loan gets sold dozens of times over the life of the loan. Our members know who they are paying their payment to, and where to go if there are any issues."
Curtis Cole, home loans manager for $307 million Southwest Airlines FCU in Dallas noted that OneUnited Bank's waived fee promotion also raises the interest rate about a quarter of a percent, with a credit at closing.
"This is not a new concept," Cole said, adding that many credit unions wrote similar loans before the refi boom. After the refi boom most CUs shied away, he explained, because the loan has to stay on the books for five years for the higher rate to make up for the waived fees.
"NCUA says we cannot charge a prepayment penalty, so there is no motivation," Cole said. "But these deals have their place. There probably will be more as rates go up. This year rates have gone up about one-eighth but are still fantastic — approximately 4.375% to 4.75%. People think rates will be at 5% to 5.5% by the end of the year, which will mean less danger of refinance."
Christine Schwarz, VP of real estate lending for $378 million USC Credit Union, Los Angeles, described the OneUnited Bank promotion as one way to get purchase borrowers into the market if they have a stable job and a good credit score, but do not have lots of cash on hand.
"Typically you see an increase in the rate to cover the fees," Schwarz said. "There are multiple ways to skin the cat. Lenders have to realize there is no one-size-fits-all solution. If someone can get into the home, they also need to be able to sustain it."
Steve VanSickler, chief credit officer for $637 million Silver State Schools Credit Union, and president/CEO of Silver State Schools Mortgage Company, Las Vegas, said waiving up-front fees is part of the overall return on investment analysis when making loans.
"The institution is willing to give up some portion of their interest income from a loan transaction by waiving fees or paying for an indirect loan," he said. "Invariably there is a cost of origination factored into each loan type such as promotion and staff."
At some point it makes sense that a lender can get more "bang for its buck" in a promotion to waive fees or pay for an indirect loan if the institution feels it will provide loans with a similar cost to originate.
As an example, VanSickler said a $25,000 equity loan at a 5% interest rate with a 15-year amortization provides first year interest income of $1,100.56. If the actual fee cost to the lender to originate the loan was $500, it has effectively given up the first 5.5 months of interest income before the loan becomes a performing asset on the balance sheet.
"Normally the hard costs are taken as an expense up front and the institution actually receives the interest income each month because the return on investment is a calculation outside of accounting practices related to the actual receipt of income," he said.
Silver State Schools CU is currently running a similar promotion on 10-year equity first mortgages with a flat fee of $599, on loan amounts below $250,000.
Judy Dodier, SVP home financing for $544 million Align Credit Union, Lowell, Mass., went to OneUnited Bank's website for a quote. She said her closing costs, even after the credit at the end, were over $2,000.
When contacted by Credit Union Journal, Teri Williams, president of OneUnited Bank, said Dodier may have uncovered a flaw in the bank's fee estimator.
"We waive all of our fees. The fees charged by others we cannot waive. The biggest one is the title fee," Williams said. "I do not know what the amount of the mortgage this person put in, but for a $180,000 home loan the title fee could be about $780, depending on the market. Plus there are a few other smaller fees."
Williams said after CU Journal asked for comment, OneUnited Bank's lending team researched the issue and said some fees were estimating too high. "We are fixing them today," she said.
The Waive Home Loan Program started because Williams kept seeing studies showing many consumers still are paying 6% or more for their mortgage.
"One of the reasons we believe people are paying high interest rates is doing a home loan requires some upfront costs," she said. "We are waiving those costs to take advantage of this loan-rate environment. We do not want fees to be an impediment to refinancing or purchasing a home."
Said Dodier: "Any time you see an offer for waived fees, no-points/no-closing costs, or something similar, the lender is getting it somewhere else. Is it attractive? Yes, but borrowers today are extremely rate conscious.
"It might make the phone ring," she added.
