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A horrifying refi

By Holden Lewis ·
Tuesday, March 13, 2012
Posted: 2 pm ET

The national mortgage settlement has a potentially ghastly surprise for some who refinance under its terms. They could end up doubling their interest rates.

Five big banks filed legal settlements yesterday with the federal government and the attorneys general of all states except Oklahoma. Ally, Bank of America, Chase, Citi and Wells Fargo had been accused of mistreating mortgage customers. As part of the settled lawsuit, the banks will spend billions of dollars on loan modifications, short sales and refinances.

The feds and attorneys general agreed to a set of refinancing rules that favor banks over borrowers. This especially is the case for underwater homeowners who currently have mortgages with rates below 5.25 percent, and who want to refinance. Many of these borrowers will be steered into five-year adjustable-rate mortgages. And after the first five years are up, the interest rate can rise far above the rate on the original mortgage.

Here's a scenario: You have a 30-year fixed-rate mortgage at 5 percent. That's a nice rate, but a family just bought the house across the street with a 4.25 percent mortgage. So you ask your bank to refinance you under terms of the legal settlement.

Your bank offers to reduce your rate to 4.75 percent or 4.5 percent -- whatever percentage it takes to cut your monthly house payment by $100.

That's all the bank is required to do, and it's not an awesome deal. And then it gets downright awful, because that rate reduction lasts only five years. Then your rate will rise -- and it can exceed the original 5 percent rate that you had.

Under this scenario, the lender could jack up your interest rate into the double digits eventually. The bank can increase the interest rate by half a percentage point each year until your rate is a full percentage point over the rate the average home purchaser is getting.

I don't know if that's the intention, but that's the way the settlement is worded.

The settlement says the loan can have "a maximum ending interest rate of 5.25 percent or PMMS + 100 basis points." It doesn't say "whichever is less."

The PMMS is an interest rate index calculated every week by Freddie Mac. It reflects the average interest rate offered in a survey of about 125 lenders nationwide. Last week, the PMMS was 3.88 percent, so PMMS plus 100 basis points would be 4.88 percent.

Eventually the economy will recover, and the PMMS will rise. Five years ago, in March 2007, the PMMS was 6.16 percent. Who's to say it won't return to that level five years from now? Then the PMMS plus 100 basis points would equal 7.16 percent.

I see nothing in the legal settlement that would prevent a bank from perpetually indexing the rate on a refinanced mortgage to PMMS plus 100 basis points. Imagine refinancing out of your 5 percent mortgage, only to find a decade later that your rate has climbed to 7 percent. It's theoretically possible to go from a 4.5 percent interest rate in the first five years to an interest rate of 10 percent in the 16th year.

Maybe, if you get stuck with such a loan, you will be qualified to refinance after your home's value recovers. In an age when banks make much of their profits from fees instead of from interest income, your lender probably would welcome another refi and the fees that it generates.

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March 26, 2012 at 10:10 am

I called Bank of America, about my underwater loan, to be refinanced and they told me that they are helping only people
who has Fannie Mae and Freddie Mac Loans> Is that a joke, how about me that have a conventional loan, I mean investor loan by
Deustch Bank and owned by Bank of america?
What's going on, with all that talk to help people that is on
time with the payments for the last 13 months and is strugling
each month to be on time!
And what's up with the Bofa, after strugling to be on time, you
have to be late again to be consider in the progam, cannot believe it!

March 16, 2012 at 4:34 pm

The new HARP program is a joke. Citi mortgage even though I qualify will not go by the guidlines and keep offering a regular refinance loan. This does not help!! The program claims if you are under water you can lower the rate WRONG!!
Someone needs to investigate CITI before the Gov. gives them more money!! The bank is a ripp off and will not help.

Holden Lewis
March 14, 2012 at 12:16 pm

Or, if you mean more generally where I got the info from:
The easiest way to find it is to look in any of the five settlement documents and search for the string PMMS.
It's Exhibit D, Paragraph 9.
It tends to be on page 148 or 149, if I recall correctly.
My colleague Polyana asked if I was being sarcastic with my answer yesterday. No. I thought you were referring to a specific assertion of mine, which was in an earlier blog post anyway. Such is the peril of working in WordPress on an iPhone in the middle of my son's high school function.

Holden Lewis
March 14, 2012 at 12:06 pm

Ah, I finally found it! In the Michigan attorney general's Q&A about the settlement:

"The state Attorneys General’s negotiating committee, which negotiated this settlement, will work
to negotiate similar settlements with other banks. It is expected that there will be additional
settlements with other large mortgage servicers."

March 13, 2012 at 7:48 pm

DO NOT USE NATIONS CHOICE MORTGAGE. This is the worst experience on a refinance. After more than sixty days of always asking for more information, list after list of requested information they decline the loan based on a question that they should have asked up front. Beware they run up fees, stall, but they never are satisfied. I have top credit and cash in the bank equal to 30% of the loan and a government job. If you use them for a first mortgage you better have a ninety day escrow or you will be up a creek.

Holden Lewis
March 13, 2012 at 5:51 pm

Hmmm. I've been looking in my browser history and can't find where I saw that info. I don't remember. Maybe I read it in a newspaper, or, worst case, I'm misremembering.

Has anyone seen something along those lines?

March 13, 2012 at 5:35 pm

Where are you getting this information from?