- - Thursday, August 11, 2011

As expected, last week Congress agreed at the last minute to raise the debt ceiling and cut spending, averting a situation where the federal government could have defaulted on its debt. Investors worldwide appeared to anticipate the move, because they continued to pour money into Treasury bonds, despite the risk of default.

Now that a deal has been reached, yields have dropped further. Mortgage rates are close to the ultralow levels of November 2010.

The refinance market continues to be brisk. Tighter lending standards and inadequate property values have kept many homeowners from taking advantage of the low rates, but for folks who are eligible, the deals are sweet.

The new loan officer compensation rules enacted last April have, in my opinion, accomplished the opposite of their intent, however. Originators now must have a predetermined compensation plan with each of its mortgage investors. Since these plans are determined as a percentage of the loan amount, folks with small loans may be offered rates only from certain lenders with high compensation plans. By the same token, originators are not allowed to credit any portion of its lender compensation to folks with large loan balances.

However, my oft-touted “zero-cost” refinance now has a new marketing spin. Before the new laws, lenders paid originators a “yield spread premium” (YSP) on rates that were slightly higher than market. Originators would use the YSP to pay the borrower’s closing costs and keep the difference as their compensation. This had been a fantastic deal for the homeowner - the ability to lower his rate and pay no transactional fees.

Under the new rules, originators receive their predetermined fee from the lender and the lender pays the YSP directly to the borrower. The marketing spin is simple. The YSP, at a particular interest rate, may exceed the closing costs.

If this is the case, the balance of the YSP will be applied to interim interest and escrow deposits. Since interim interest and escrow deposits are items the borrower would pay whether or not he refinances, the lender technically is paying the borrower to refinance.

Let’s take a real-life example. I have a borrower in Fairfax County with a $350,000 loan balance secured against a property worth more than $600,000. He has lots of equity, great credit and income - a perfect borrower.

I recently locked him into a 20-year fixed-rate loan at 4.125 percent. The lender credit to the borrower is $4,984. In Fairfax County, he can expect the closing costs, which are items such as appraisal, title insurance and recording fees, to total about $3,900.

Since the credit will exceed the closing costs by $1,084, the balance will be applied to the borrower’s interim interest and escrow deposits - items the borrower would pay anyway. So the lender is paying the borrower $1,084 to refinance his loan to a 20-year fixed rate at 4.125 percent. It’s a great deal.

The rules, as I understand them, however, don’t allow the closing-cost credit to be applied to the principal balance. In other words, if the lender credit exceeds the sum of the closing costs, interim interest and escrow deposits, the borrower will be leaving some money on the table.

My message to qualified homeowners: Check your mortgage statement and call a reputable lender or broker. The chances are good that you can benefit from a refinance.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.


Copyright © 2018 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.

 

Click to Read More and View Comments

Click to Hide