To tackle a perennial risk, two top home loan companies are pushing an adjustable rate that adjusts in only one direction - down.
The No. 4 home loan servicer, Countrywide Credit Industries Inc. of Calabasas, Calif., said 99% of its eligible loans now carry the option, which it launched this month and calls the eEasy Rate Reduction Plan. The 38th-ranked servicer, the mortgage unit of GreenPoint Financial Corp. of New York, rolled out a similar product this month, the Rate Improvement Mortgage.
The chief selling point is that the loans, whose rates are adjustable if interest rates fall but are capped if rates rise, would spare homeowners the cost of refinancing and the hassles that come with it, such as getting new title insurance and appraisals and paying legal fees. But arguably the biggest beneficiaries would be the lenders, who would be better protected against runoff in servicing portfolios the next time interest rates fall.
Joe Garrett, a former thrift executive and who is now sales director at Xpede Inc. in Oakland, Calif., said the convertible product being offered by Countrywide and GreenPoint would enable the lenders to remove commissioned loan officers from the refinance process, where their talents are wasted.
Fannie Mae introduced a product called the Rate Improvement Mortgage in 1988, but "it never took off, because you had to pay a higher rate to go in," Mr. Garrett said. But now GreenPoint and Countrywide believe they've found ways to price the convertible loan at or near the rest of the market - possibly seizing a competitive advantage over other lenders.
Initially, GreenPoint's loan would be priced an eighth of a percent higher than the market, said Peter T. Paul, president of GreenPoint Mortgage Funding Corp., Larkspur, Calif. GreenPoint customers would have the opportunity to exercise the rate-reduction option every 90 days, but only one time over the life of the loan. They could lower rates only by seven-eighths of the amount rates fell since the loan was first made. GreenPoint also charges a $250 fee for lowering the rate.
The borrower would end up paying half a point more than the market rate, but the third-party fees usually paid when a loan is refinanced often cost about 1% of the loan balance, Mr. Paul said.
Countrywide's program is more aggressive. The borrower can lower the rate as many times as desired, as often as once a month, said Mike Taliaferro, executive vice president. There is no up-front premium for having the reduction option, he added.
When the borrower does take advantage of the rider, though, Countrywide charges 2.5%. But that fee can be rolled into the loan balance, provided the balance does not exceed the original amount; or part of it can be incorporated into the note rate.
The tricky part: finding investors for the loans. "The investor community would definitely demand higher yield" for such loans, said Larry Goldstone, president of Thornburg Mortgage Inc., a Santa Fe, N.M., real estate investment trust with $4.5 billion of mortgage assets.
However, Mr. Paul noted that if borrowers in GreenPoint's program lower their rate, the loan has a higher coupon than what is currently being originated, so the investors end up with an asset worth slightly more than face value. He added that GreenPoint has yet to determine whether it will sell the product as whole loans, securitize it, or hold it in portfolio.
Countrywide officials declined to say to whom it was selling its rate-reduction mortgages. In July, Countrywide said it had agreed to sell most of its production to Fannie Mae, so one might guess that Fannie is the buyer of the rate-reduction mortgages. A Fannie spokeswoman said the secondary-market company's policy is not to comment on its arrangements with lenders.
Another possibility is that lenders could sell the mortgage at the current interest rate, and if rates fell and borrowers opted to lower their coupon, the lender could simply repurchase the loan out of the pool and reissue the loan in a new security, Mr. Paul said.