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New mortgages lower payments when
borrower's behavior or rates improve
By Michael
D. Larson • Bankrate.com
 A
lender that rewards good behavior as much as it punishes bad? A
mortgage company that slashes its customers' payments automatically?
Yeah, right.
Actually, it is. A handful of mortgage companies
now drops rates for their borrowers when interest rates fall. Some
home equity lenders do the same for customers with less-than-perfect
payment histories who send their checks in on time.
Taken together, these developments suggest people
will increasingly find themselves able to cut their debt without
experiencing the hassle -- and financial burden -- of refinancing.
"We notify all of our customers when the rate
has dropped and encourage them to drop the rate," says James Riley,
chief executive officer at City
Line Mortgage Corp. of San Diego. The company offers
its "Declining Rate Loan" to conventional borrowers in 15 states.
'Easy,
logical thing'
"If their rate is lower, then nobody else can take that loan
away from us," he adds. "It's such an easy, logical thing, it's
unbelievable."
Unbelievable indeed, considering financial institutions
seem to be much busier lately coming up with $29 credit card fees,
$2 ATM surcharges and penalties for visiting tellers on every third
Friday, excluding those that fall during a leap-year February. But
thanks to some prodding from consumer advocates and a bit of innovative
thinking among certain lenders, rate reduction programs are becoming
more widespread.
"We're almost like the test case, but we've
had tremendous success," says Keith Kelly, division manager for
Fairfax, Va.-based Service
Savers. The company's "Automatic Rate Cut" loan requires borrowers
to pay a slightly higher interest rate upfront. But it allows them
to avoid closing costs and gives them the chance to lower their
rate every 120 days each time market rates decline by a quarter
of a percentage point or more.
"Ours is primarily different because we're trying
to give the consumer peace of mind," he adds. "They're getting inundated
every week in a refinance boom, both in the mailbox and at dinnertime.
But from the start, ours is designed to educate the consumer on
why they should never pay closing costs, and then to automatically
contact them when they can actually save money."
A
popular concept
It's unclear exactly who first thought of the adjusting mortgage
concept, but it has clearly been a popular one. As more companies
and consumers become aware of it, the pace of its acceptance has
picked up, too.
Service Savers, for example, had been offering
its program to refinancing borrowers for a few years. The company
opened the program to home purchasers last August in response to
consumer demand. City Line, which rolled out its loan about two
years ago, says it has received inquiries from top U.S. lenders
about the program's details and viability.
On the home equity and subprime loan fronts,
the story is pretty much the same.
The Money
Store division of First
Union Corp. is among the biggest companies in the subprime
industry, which specializes in lending to customers with imperfect
credit. It introduced what it calls the "Back on Track" mortgage
in September 1998. Now, the unit says that roughly 30 percent of
its retail business comes from the special loans, which let borrowers
shave up to 1.5 points off their interest rates over the course
of four years by sending their money in on time.
Some
based on payments, not rates
"It's based totally on their payments with us. It's not dependent
on what rates do in the market," says Bill Lowman, senior vice president
and head of sales for the Money Store unit. "The whole premise of
the Back on Track program is we try to do what's best for the customer."
Government officials have gotten behind the
idea as well. In a March statement,
Office
of Thrift Supervision Director Ellen Seidman indicated she'd
like to see more companies offering what her agency nicknamed the
"Track Record Adjusted Mortgage." And after a years-long legal brawl
with the Neighborhood
Assistance Corporation of America over its lending practices,
that's exactly what Associates
First Capital Corp. agreed to do.
The massive Irving, Texas-based consumer finance
company said in May it would make a rate reduction loan available
to low- and moderate-income borrowers as part of a settlement it
struck with the Boston activist group. On July 1, it expanded the
"Freedom Loan" program so that anyone who wanted to apply for it
could.
"We thought there might be some really nice
appeal across our entire portfolio," says Associates spokesman Randy
Johnson. "It really offered a lot to our customers and we also felt
comfortable it would work from a business perspective.
"It's an inclusive type of program."
Will others join the party? Some experts seem
to think so, especially because a secondary market for declining-rate
mortgages is emerging the same way one already exists for old-fashioned
fixed- and adjustable-rate ones. In the meantime, borrowers can
try shopping with one of the companies already offering them --
or pestering their own lenders into doing the same.
"I think there's a lot of misconception out
there" about the concept, says Kelly from Service Savers. "It's
not necessarily the fault of loan officers in banks, it's just the
old school of thinking."
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