With droves of homeowners seeking to refinance their high-interest mortgages, one lender in the Washington area is offering to refinance some loans for $100, and other lenders say they are considering starting similar programs.
The cut-rate refinancing, which is being offered by Dominion Federal Savings and Loan in McLean, is technically not a refinancing but a modification of an existing loan. Dominion Federal has sent several hundred letters to some of its customers offering to reduce the interest rate on their loans by several points for a flat $100 fee, considerably less-than for a traditional refinancing.
The drop in mortgage interest rates to 10 percent or below during the last few months has triggered a surge of refinancing, as homeowners with mortgages at rates above 12 percent seek to lock in the new, lower rates.
While refinancing a mortgage can save a homeowner several hundred dollars a month in mortgage payments, it also costs a considerable chunk of money, usually as much as 4 to 6 percent of the total loan.
In a typical case, Dominion Federal gave one Washington couple the chance to have their existing mortgage rate of 12 3/4 percent lowered to 10 3/4 for the $100 fee.
The couple, who requested anonymity, had been considering refinancing their loan and had been offered a new loan at 9 1/2 percent. The new loan, however, would have cost them nearly $7,000, including discount points, a prepayment penalty on their original loan and refinancing costs.
"It's a deal you can't pass up," one Northern Virginia borrower said. "We can't believe we are lucky enough to have a lender offering this."
William Walde, chairman of Dominion Federal, said the company has made the offer to people who already have loans with the company and who have been good customers in the past.
"We are trying to protect our existing customer base," Walde said. "We are offering it to our customers who have been good customers. We are trying to keep them."
Walde said the company cannot make the offer to everyone who has a loan held by Dominion Federal, but he added that it has modified several hundred loans and plans to do more. He said that 97 percent of the borrowers offered the service have accepted.
While the refinancing surge has brought lenders nearly unprecedented business during the past few weeks, it also has hurt some lenders who service loans. Dominion Federal's offer has been part of an effort to keep the company from losing too many servicing contracts.
When a lender makes a loan to a home buyer, he typically sells the loan into the secondary market, where it is bought by an investor. The lender then retains, or sells to some other lender, the right to collect the payments on the loan and pass them on to the investor. The lender gets a small fee for collecting and forwarding the payments.
Lenders who purchase these rights -- called servicing contracts -- from another lender pay the company that made the loan an upfront fee, which the servicer earns back as it collects the fees on each payment.
When a homeowner refinances, however, the original loan is paid off, and the servicing contract for that loan ends. The lender, who has paid for the right to collect the payments, loses that right when the loan ends. While the borrower has gotten a new loan, the lender would have to purchase the servicing contract for the new loan to replace the loss of the other. With the large number of refinancings, several lenders have found that the amount of money they make servicing loans is dwindling, and they are looking for ways to retain the loans they service.
Dominion Federal has been able to modify loans it either holds in its own portfolio or loans held by investors that agree to the changes. The advantage for the investor is that, even though the modification will lower the yield on the loan, the new interest rate is not as low as the market; therefore, the investor still retains a loan with a yield slightly better than the current market rate.
Thomas Edmunds, vice president and regional manager for United Virginia Mortgage Corp., said his company is considering ways of offering a similar deal.
Edmunds said the reason most lenders are not offering modifications is because most lenders sell their loans to companies that pool large numbers of mortgages and then sell securities backed by the loans. The way the loans are packaged creates some legal barriers to allowing modifications.
Both of the federally chartered secondary-market conduits, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), say they do not allow modifications for that reason.