For some, mortgage refinancing may look like a sure-fire way to trade in equity for ready cash at a favorable interest rate. But consumer experts warn that refinancing may not be what homeowners bargain for.
The Federal National Mortgage Association and other financial institutions are promoting refinancing, because they see it as one way to upgrade portfolios burdened by low-yielding mortgages. But present Truth-in-Lending laws do not require full disclosure of refinancing costs, points out Ellen Broadman of the Consumer's Union.
The House commerce, consumer and monetary affairs subcommittee has examined Fannie Mae's figures and calculated that the "hidden" rate paid for the new money would be more than 16 percent and a full point above the rate paid for a second mortgage at that time.
The subcommittee has polled 120 representative S&Ls around the country on their refinancing programs. Although the findings still are being tabulated, the subcommittee has found that the hidden rate may be as high as 23.16 percent, when the rate disclosed by the lender is only 15 1/4 percent. In many cases, a staff member said, a second mortgage would cost the home buyer a lot less.
An informal survey of mortgage lenders in the Washington area indicates some variation in what they disclose to customers seeking refinancing.
"We make all required disclosures," said Columbia Federal S&L President T. William Blumenauer. He adds that the bank tries to tell people what the refinancing actually is costing them. If the borrower went to another lender, he would have to pay the full market rate on any new loan, he notes.
Although Washington Federal S&L only discloses the total cost, it usually advises customers to take a second trust if they want to draw on their equity, says President James Harris.
Fannie Mae has refinanced 9 percent mortgages a $30,000 unpaid principal to $60,000 for 12 1/4 percent. Under present Truth-in-Lending rules, lenders must disclose the annual percentage rate for the entire loan. But that's only half the story, Broadman contends, because lenders may fail to inform homeowners of the rate paid on the new $30,000.
Disclosure is needed to help consumers comparison-shop, Broadman argues. She notes that refinancing carries additional costs of settlement not included in a second mortgage.
Rep. Benjamin Rosenthal (D-N.Y.), consumer subcommittee chairman, has urged Fannie Mae to provide information on the interest-rate differential, but the company has refused. In the letter to Rosenthal, Fannie Mae President David Maxwell explained that the term of a second mortgage is only five to 15 years while a refinanced loan carries a 30-year term. Therefore, disclosure would be meaningless, he argued. Maxwell said that homeowners will ask lenders for a comparison of related costs anyway -- or calculate the costs themselves.
The Rosenthal subcommittee has petitioned the Federal Reserve Board unsuccessfully for several years to alter the disclosure requirements for refinancing. It will try again this year after its study is completed, but a staff member says he is not optimistic.