Refinancing waves sparked by falling interest rates have long been a mixed blessing for all involved.
The consumer lowers her monthly payment, but often pays fees and signs mounds of paperwork. Banks reap profits from originating the new loans, and their salespeople rake in commissions. But banks and mortgage servicers also lose customers in a refi wave. And the investors in mortgage-backed securities get their principal back sooner than expected, and must redeploy it in a lower-rate environment.
A product recently rolled out by Mortgage Harmony Corp. of Vienna, Va., tries to realign the interests of these various parties.
Based on the five-year adjustable-rate mortgage, the HarmonyLoan lets homeowners reset their interest rates to the prevailing market rate every 120 days, without fees, simply by clicking a reset button online. The reset option is written into the original loan documents. To be eligible for a reset, customers need only to have been current for the previous 12 months.
Since the loan itself stays on the books, the investor is spared the expense of finding a replacement asset, says Mortgage Harmony, which makes its money off the HarmonyLoan by licensing the software and intellectual property. And although loan officers lose the opportunity to make a commission on a traditional refi loan, the HarmonyLoan assures the salesperson a 6- to 10-basis-point yearly annuity "trail" after the first reset that continues through the life of the loan.
About a half dozen credit unions and 1st Commonwealth Bank of Virginia are using the HarmonyLoan program, which was rolled out in December.
Craig Chatman, managing director of the $50 million-asset 1st Commonwealth, in Arlington, said HarmonyLoans have helped him recruit loan officers. "Everybody sells the same thing right now, so it is nice to be a little different," Chatman said. The product "weaves the loan officer incentive piece and the technology for the consumer" together.
Keith Kelly, Mortgage Harmony's chief executive, said he is in talks with major financial institutions. "Because our economy is in the doldrums, a lot of people have not been able to get access to the lower interest rates," Kelly said. "We created this product to help the consumer not to have to worry about appraisals and not to have to worry about a new credit rating — as long as they are making their payments on time, they are eligible to click that button."
The timing for this product isn't ideal. Keith Gumbinger, vice president of HSH Associates, a publisher of consumer loan information, said that because rates on ARMs are at "record lows" (with the one-year ARM at about 3.5%), the reset option's potential benefit to a borrower is slim. "Rates have not been lower than this in modern times," he said. "If we were talking about ARMs at 7%, this would be viable for consumers, because the opportunity for a lower interest rate would be an opportunity to exercise this choice."
David Brashear, president of Edgewood Investors, said the potential to save money by resetting led him to take out a jumbo HarmonyLoan to buy a house in Bronxville, N.Y. "In New York it is very expensive to go through any kind of refinance, and one of the beautiful things about the HarmonyLoan is that it takes away the need to go through the refinance process," Brashear said.
However, Brashear said there are circumstances under which he might not consider taking out a HarmonyLoan. "If you were approaching retirement, you might have a more defined time horizon," he said. "You might look for some kind of locked rate."
Gumbinger said the relatively loose underwriting standards to let the borrower exercise the reset option might raise questions for investors. "If the borrower is underwater, are they still going to continue?" he said. "The reality is that market conditions do change. … How are regulators going to feel about refinancing people who are seriously underwater?"
