By Kenneth R. Harney
Saturday, May 12, 2007

Home loan industry competitors are searching for hidden gimmicks, but Bank of America insists that its "no-fee mortgage plus" plan announced this week delivers exactly what the name implies -- without raising interest rates to applicants.

The new program comes with none of the traditional mortgage and settlement charges -- application fee, appraisal fee, credit, underwriting, processing, title insurance, title search, private mortgage insurance, flood certification or closing fees -- and offers "competitive" interest rates.

On a typical loan, these fees can amount to 3 percent to 5 percent of the mortgage amount, depending on location, and run into the thousands of dollars.

Bank of America says it is so certain that its no-fee deal stacks up well against competitors' rate-plus-fee offerings that it is urging applicants to comparison-shop, with Bank of America's quote in hand, before making a final commitment. If an applicant who is approved by the bank for a no-fee loan chooses to close with a competitor, the bank promises to pay that applicant $250.

The no-fee package also comes with a 25-days-or-fewer closing guarantee. And the bank says that if the closing occurs after the deadline, it will pay the applicant's first month's worth of principal and interest.

Is this all for real? How can a lender eat thousands of dollars in costs without somehow slipping them into the deal somewhere? So-called zero-cost refinancings are readily available in the market, but they typically include the origination and settlement charges in the note rate -- bumping it up by an extra one-quarter of 1 percent or more.

Other lenders have offered "guaranteed mortgage package" quotes of rates and fees with no additional charges allowed between application and settlement. But those packages still charge borrowers most of the traditional lender and closing costs.

Floyd Robinson, president of consumer real estate for Bank of America, said the company is able to offer "a true no-fee mortgage product" in part because of its sheer size -- $1.5 trillion in total assets, 55 million banking customers nationwide, and a nearly $350 billion portfolio of first and second home mortgages. That size allows it to create cost efficiencies and take over certain responsibilities that smaller institutions cannot.

For instance, the no-fee program allows down payments as small as 5 percent for conventional mortgages up to $417,000 -- and even lower for certain "jumbo" loans up to $3 million -- without private mortgage insurance premiums. The bank intends to keep all or most of the no-fee loans in its portfolio, Robinson said in an interview.

"We are the investor, and we assume the risk" of defaults or foreclosures on loans with low down payments. Rather than requiring borrowers to pay monthly mortgage insurance premiums, the bank is self-insuring the risk and charging customers nothing for the service.

Sensitive to any suggestion that the new program loads nominally waived fees into the interest rate, Robinson said "our rates are very competitive" with other lenders who charge all the usual fees. Competing brokers or lenders might be able to quote slightly lower note rates, he said, but when shoppers look at the truth-in-lending annual percentage rate disclosure -- where all the loan costs are factored into the effective rate being charged for the loan -- "we are confident that we will have the best deal."

If not, "we'll pay you, no questions asked."

Robinson added that the no-fee approach allows borrowers to choose key service providers such as title insurance and closing agents rather than using bank-designated firms.

Some competitors are skeptical that the new program could do everything the bank claims. Steve Cecco, president of Ameristar Mortgage Group in Albuquerque, said, "There's no way that anybody originates or closes a loan for nothing -- it's got to be reflected in the rate or somewhere else."

Mike Bennett, Western regional sales manager for Wilmington Finance, a mortgage subsidiary of insurance giant AIG, gave the program grudging respect. "I don't know too many people who can compete with it" in its current form, he said. "It's obviously a loss leader for Bank of America." That is, he thinks the bank is cutting profit margins and internal costs to bring in customers to whom they can later sell other, more profitable products and services.

Some limitations Bank of America includes in the fine print: