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Refinancing: New rate, new rules

Sure, change is good. But switching from one mortgage company to another can be downright traumatic.

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Sometimes it's a "paper or plastic" choice, in which two lenders do something differently but still get it done because the law requires it.

Other times, moving the mortgage involves more hassle than moving the family did. Either way, experts say borrowers should take steps to avoid problems with the fees, extra junk mail and escrow account foul-ups that occur around the time people refinance or have their loans sold.

With the advent of national uniform documents, the paperwork people fill out during the loan-making process looks much the same everywhere. After closing is when differences among lenders crop up, says Howard Gosnell, escrow services manager for Mercantile Bancorporation Inc.'s mortgage company.

"People can expect for the very most part to be treated about the same by any lender as any other with regard to the legal requirements. But culture is different," says the executive from St. Louis-based Mercantile. "Just from my own personal experience, there are very big differences in terms of how they do customer service -- how long you have to wait to talk to a human being. Those kind of things will vary from institution to institution."

More borrowers face new lenders
A growing number of people have to face a new lender, by choice or chance, due to the boom in refinancing plus a trend among lenders toward re-selling the loans they issued.

Many borrowers look at refinancing as a necessary evil: They're comfortable with the familiar practices of their current lenders, but when rates are low, it's tough to resist locking in a better loan. The lower interest rate and monthly payment can free up cash for other uses or just make the debt load more manageable.

Amid the low-rate glee, however, homeowners sometimes forget that refinancing can usher in changes that have nothing to do with interest rates. A new lender may not "service" the new loan the way the old lender did, for example. That means a borrower may have to deal with a telephone rep halfway around the country rather than someone at the local bank branch. The new lender could drop the ball on making escrow payments. A new fee schedule may apply in other instances, so getting a copy of a document for reference may all of a sudden cost $20.

Because of these and other considerations, experts say borrowers who are refinancing should research their potential lender's practices as well as pricing. In the case of loan sales -- when one lender sells its "servicing" right to collect payments, cross-sell additional financial products and manage escrow accounts to another company -- people don't really have any say in the matter. But they can adjust their financial behavior to avoid any unfamiliar fees or hassles.

When you can, investigate first
The consumer should "shop several places to see what is the best solution for them, and the best solution is not always served by the lowest rate," says Walter Carter, executive vice president of Advanta Corp.'s mortgage company. The Spring House, Pa.-based lender mostly issues non-conforming, or subprime, mortgages through telephone centers, branch offices and brokers.

"I think people need to weigh (other factors) instead of just, 'Let's see, how low can I get my payment?'" Carter says.

Among the first things to consider is whether a lender plans to service the loan itself. A small lender may keep its servicing in-house, for example, meaning any problems with a mortgage can be taken up with a loan officer down the street. Or, it could sell that loan "servicing-released" to a larger, national company, which customers would deal with primarily through the telephone, Internet or by mail.

People who prefer local help and don't want to refinance with a company that often sells its loans can research the likelihood of that happening early on in the hunt. The law requires lenders to spell out what percentage of past mortgages were sold around closing time, so they have those numbers available and should provide them if a potential customer asks.

"This is and has always been a very sticky consumer issue with the advent of the secondary market and the securitization of notes. It's more likely that your loan is going to be sold than not today," says Rick Harper, director of housing for the Consumer Credit Counseling Service of San Francisco. "The biggest thing that consumers need to understand is that it's the rule now, not the exception. If you gear yourself up for it, they can handle the frustration a little better."

Check out those fees
Borrowers should be careful to evaluate the fees a potential lender (or its servicer, if the company sells its loans) charges for performing certain tasks. That's because banks have started doing with their loans what they've done already with their checking accounts: hitting customers with fees for services that once were free.

"You will see a pretty wide difference in those ... but every lender that I see has a menu of its charges," Mercantile's Gosnell says. "The industry has gone in the last several years to more charging for things that are beyond basic servicing, such as faxing documents, multiple copies of documents.

"It's a subject of some hostility among borrowers, but it's just a recognition of the need to try to cover as much overhead as possible."

At Mercantile, for example, servicing customers pay $15 for an amortization schedule and $1 per page for copies of their loan histories, subject to a $5 minimum. People can figure out their amortization table and the effect of prepayments using this calculator.

To avoid getting nailed with fees after a loan sale, people should be sure to keep the free documents and disclosures they do receive rather than throw them out and end up having to order new ones.

Another potential change involves payment methods. Many people must switch from coupon books to statements, or vice versa, when they change servicers. The transition means customers used to sending in a page of their book each month -- dutifully including an extra principal check and filling that amount in on the line provided -- may have to adjust to the process of receiving a monthly statement instead.

On some occasions, switching loans or loan servicers can benefit the borrower, especially one who has changed jobs since obtaining the original mortgage, Gosnell adds. A customer could potentially go from getting paid on the 16th of the month and having the mortgage payment due on the 15th to having it the other way around, since the new company may permit him to shift the due date.

Still, problems of a more serious and expensive nature can pop up when a consumer deals with a new mortgage company.

Borrowers who paid less than 20 percent down to buy their homes, for instance, will likely have escrow accounts unless they've built up 80 percent equity since then. Mortgage servicing companies pay taxes and homeowners insurance premiums from these accounts, but problems can pop up when people refinance or have their loans sold around the time those bills come due. (For more information about potential escrow woes, see the story linked at the bottom.

Here comes the junk mail
Customers also will have to get used to receiving even more product solicitations than they already get through junk mail. Servicers increasingly have turned to envelope-stuffers as a way to make more money by drumming up additional loan or other business.

"You build brand awareness and relationships. The challenge is to retain the customer as long as you can," says Carter of Advanta Mortgage. "We have just converted in the last year from coupon books to statements, and that was part of our strategy there, bridge-building opportunities."


-- Posted: Jan. 8, 2003




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