Refinancings are a double-edged sword for lenders--new customers may arrive en masse, but loan departments can be inundated with applications, fall behind and peeve impatient customers. Any means of flattening the cyclicality of the mortgage business and keeping current customers paying is an answered prayer.

That's exactly what First Chicago Corp. had in mind when it rolled out the First Flexible Mortgage in early October. It's an adjustable-rate loan that offers customers a series of options for lowering rates while providing a shield against rising ones. By keeping borrowers in the house and not having to chase refinancings, the bank can avoid the sharpest side of the refi sword.

At its most basic, the loan, available for conventional and jumbo (over $202,300) mortgages, starts out as a typical 5-1 ARM, with the rate set for the first five years, then adjusting annually.

But borrowers don't even have to wait out those first five years. In one option, within the first two years the borrower can choose a lower note rate if rates fall at least 75 basis points. After the first two years, he or she can take lower mortgage rate if rates slide at least 35 basis points. This new rate is in effect for the rest of the first five years--or until the borrower chooses another, lower rate should long-term rates drop significantly again.

Rather than having to complete a new application and revisit the mortgage rigmarole, First Chicago charges the customer a $500 fee and asks her to sign a short document. Plus the customer is still paying off the old loan, not starting afresh on a new 15- or 30-year loan.

In option two, borrowers can convert to a fixed rate any time after the first two years for a $250 fee. The third option: After the first five years, customers can choose to adjust annually at each adjustment period or lock in the prevailing rate for another five years.

The First Flexible loan is being marketed in the greater Chicago area, and accounted for a third of the bank's mortgage sales in its first week, says First Chicago spokesman Thomas Kelly. No decision has been made about offering it to merger NBD Bancorp. customers after the merger closes at year-end, he says.

First Chicago sees the mortgage as a winner for consumers and for itself: When rates are falling, it can keep existing customers in the fold and seek new business while competitors are wrestling to tame refinancings' paperwork bears.

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