Refinancing: New rate, new rules
Sure, change is good. But switching from one mortgage
company to another can be downright traumatic.
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
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
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
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."