No-fee home loans, which have surged in popularity recently, are causing a rift in the California mortgage industry.

Lenders and investors are at odds with brokers because of the rapid or "retread" refinancing that occurs when a home loan is refinanced months, instead of years, after it is originated.

The result is that lenders sometimes find themselves closing what is essentially the same loan over and over again.

The practice has become popular because each time interest rates drop even a tiny amount, borrowers can lower their monthly payments without laying opt cash.

A Losing Proposition

Lenders lose money in the process because they count on Income over the life of the loan -- rather than closing charges -- to recoup their costs of origination. But brokers make money, sometimes several thousand dollars, each time the loan closes.

Lenders say the phenomenon also hurts them by churning their portfolios of mortgages and reducing the value of loans they sell into the secondary market.

Brokers say that's too bad; rapid refinancings save the consumer money and are just good business.

Brokers' Motives Questioned

Joe Garrett, president of American Liberty Bank in Oakland, says the mortgage brokers are mostly interested, in lining their own pockets, not in saving the consumer money.

"Trying to refi to save [the borrower! $10 while putting $2,000 into the broker's pocket is not my idea of fair play," Mr. Garrett says.

But Phil Lipp, senior vice president of U.S. Home Loan Co., a Los Angeles mortgage broker, answers that lenders have only themselves to blame.

"If lenders do these free refis, they're sort of enticing the situation," he says.

Mr. Lipp also contends that brokers are a convenient industry whipping boy because they are involved in as many as 60% of the home-loan closings in California. He says mortgage bankers and other lenders are themselves seeking to bring in refinancings.

Lenders' Hands Tied

Mr. Garrett calls that a "disingenuous" assertion.

"We solicit our portfolio to keep our business, but we would not call somebody up to refi if they were going to save $18 a month."

While a recent uptick in rates has lessened the phenomenon, retreads remain a worry to the industry. To some extent, lenders have their hands tied.

State law prohibits the imposition of prepayment penalties that would effectively end the practice. Lenders also cannot act together to go after the brokers because of antitrust considerations.

Cutting Off the Notorious

But a few lenders are attacking the problem by identifying notorious retread brokers and refusing to do business with them.

Mr. Garrett of American Liberty said his bank had identified three brokers abusing consumers' willingness to refinance. He did not name the brokers, but said his bank had cut them off.

Neither side says borrowers should be kept from legitimately taking advantage of drops in rates. But all agree that the trend is troubling and could end up killing no-fee refinancings.

"I don't know what the solution is," said C.M. "Corky" Watts, chief executive of PIB Mortgage Co., San Jose. "But if the mortgage broker gets paid and the lender and the investor get screwed, that's not going to work."

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