The relationship between mortgage lenders and their customers is a fragile one. When interest rates fall, borrowers won't think twice about dumping their lenders and shopping for a better deal. Lenders, meanwhile, often don't make much effort to keep those borrowers because it's more profitable to book new loans than refinance existing ones.
To Craig Chapman, the director of mortgage services at 1st Commonwealth Bank of Virginia in Arlington, the whole refinancing process runs counter to the idea of building longer-lasting customer relationships. His view is that if lenders made refinancing easier, customers wouldn't be so quick to jump ship when rates drop-and might even sign up for other loan and deposit products.
Enter the Harmony Loan. Later this summer, 1st Commonwealth is planning to roll out a new mortgage product that re-sets with a simple phone call or click of a mouse.
The Harmony Loan was developed by Mortgage Harmony, a "financial engineering" company in Vienna, Va., that markets mortgage products and services to banks and credit unions.
Borrowers interested in the loan can apply for it at origination and, after six months, refinance whenever rates fall by at least 25 basis points.
Shane Chalke, Mortgage Harmony's president, says the loan saves the borrower much of the hassle of refinancing. No more filling out mounds of paperwork or taking days off from work to wait for a home appraiser.
The bank, meanwhile, "keeps a longer relationship with the customer," he says.
Chapman of 1st Commonwealth hopes that just offering the loan will help the bank win a larger share of the customer's wallet. "As a community bank it's our mandate to serve the community, and we'd like to have more than one relationship with our clients," he says.
So far, only 1st Commonwealth is offering the loan, but Keith Kelly, Mortgage Harmony's chief executive, says that his firm is in talks with several other lenders.
One thorny issue Mortgage Harmony had to resolve before it started marketing the Harmony Loan was how to compensate loan officers. Lenders make, on average, 50 to 75 basis points up front on each loan they make, whether its a purchase or a refinance. What incentive would they have to sell a product that essentially guarantees a borrower will never refinance?
Mortgage Harmony's solution: recurring compensation. Once a customer initiates a rate change, the broker who originated the loan would collect a small commission-roughly 10 basis points-each year for the duration of the loan. That might mean fewer commissions during refinancing booms, but the tradeoff would be a steadier stream of income in down cycles.
"We're essentially paying the loan officer to manage that loan with the customers over time," says Chalke.
Banks must keep the loans on their books, since Mortgage Harmony is still working on drumming up interest from the secondary market. That's fine with Chapman, whose 16-month-old bank needs to build up assets.
Still, Chapman expects it won't take long for a secondary market to develop. "If [investors] were willing to trade a 500 credit score, subprime loan, I have to figure they'd be interested in a 760 jumbo loan that pays perfectly all the time," he says.