This is the advice that I just gave one my clients who closed a loan with me in 2005 with (gasp) New Century Mortgage. She was going through a transition in her life and she is not a "subprime" borrower, but a divorce can create subprime situation. What was her nasty rate that I provided her via New Century? Here is her scenario:
- 100% LTV using two mortgages (80/20).
- 1st Mortgage is a 3 year fixed 5 year interest only with a rate in the mid 5% range with a three year prepayment penalty (not optional to waive).
- 2nd Mortgage is a 30/15 in the mid 9% range.
Yesterday I sent out an email to my entire database of clients to provide information about the subprime mortgage industry. Since her mortgage is with New Century, she was naturally concerned and called me. While talking to her, she told me that she is in the process of refinancing her second mortgage to a 10 year fixed rate mortgage. She just wants to lower the rate and pay it off–great intentions!
Here’s the possible problem. When you refinance two mortgages, if the second mortgage is not a "purchase money second mortgage" (the original mortgages from purchasing your home) it is then priced as a "cash out refinance" even if at that transaction, no cash is received by the borrower. This can really impact pricing on the first mortgage when it’s time to refinance.
"Loan to value " is just one of the factors in pricing a rate for a mortgage. With a cash out refinance, if your loan to value (new loan amount/value of home) is:
-
70-80% LTV may equal 0.50% to fee (or approx. 0.125 – 0.250% to rate)
-
80-90% LTV may equal 0.75% to fee (or approx. 0.325 – 0.625% to rate)
Here’s my advise for this client:
Her prepayment penalty will be over next summer and since she does want to stay in her home, I advised not refinance the second mortgage. The refinance proposal from the credit union does provide a better interest rate and would shorten the term of her second mortgage to a 10 year over a 30 year amortized with a 15 year balloon, and it would increase her mortgage payment over $100 per month. I suggested that she keep the current second mortgage and apply the $100 extra she’s willing to pay towards the principle of her existing second mortgage.
Then, next year when her prepayment penalty is over, refinance both mortgages at that time and receive the best rate possible (non-cash out) for her new mortgage. And reduces her closing costs to one mortgage next year instead of closing a refi for the second mortgage this year and again for refinancing the two mortgages next year.
Alas…something good to come out of contacting my clients about the current subprime scenario!
HI Rhonda, thank you for your very informative website/blog. (Happy Belated Birthday!)
I wanted to say that I agree with your advice regarding Not refinancing a 2nd mortgage yet, however I wanted to comment on a new phenomonen that we may not see all of the time.
A client called me earlier in the month and she wanted to refinance her First mortgage of an 80/20 combo loan she obtained through “builder” financing when she relocated and purchased a home. The builder went through Accredited Home Lenders, the first mortgage is a 2/28 with a 2 year prepay and the rate will increase to about 7.50% in May 2007.
These high FICO score borrower, 730+ at the time, high full doc income $15K, and assets in savings, checking, and 401ks totaling over $175k were placed into 100% financing through Accredited! WOW, I was shocked…talk about the builder not caring!
They sought 100% financing since they are very transitional. His job moves him around every two to three years, so they don’t feel the need to put equity into the places they move to and his company reimburses for all moving and loan costs associated with the relocation. I advised that I didnt necessarily agree with her comments of not putting any equity from other homes into the one being purchased but that was only my opinion I stated.
I ran her loan through an AUS and got a streamline approval, waiving just about everything for these excellent peforming borrowers. I entered the loan information stating that we would request a subordination from the existing 2nd mortgage, a 30/15 fixed rate in the low 10%s.
Sent in the subordination request form and required documents, along with the subordination fee and waited, waited and waited. Then about a week later the decision to subordinate was declined due to PMI.
What? PMI on a second mortgage? YES, not the traditional PMI that is used on FNMA or other securitized high LTV loans that the borrower pays in some fashion or another, but this was “force placed” mortgage insurance on a pool of second mortgages that this bank purchased. The person in servicing stated that the bank cannot allow a subordination since the terms of the first mortgage would change, which would in turn cancel their mortgage insurance on the second and the banks position is that its too risky to do. Mind you, this borrower has paid ALL 24 payments on time and their lowest credit score is 720, incredible I thought.
There isn’t much out there with regard to these banks buying pools of 2nd mortgages and placing mortgage insurance on the entire pool, absorbing the cost of the premium but holding the borrower hostage due to their actions. Mind you this action was without any notification or otherwise to the borrower and since the bank is paying the premium there is nothing reflected on her monthly statement. She was livid and upset that the bank knew how they purchased the loan from and could have told her ASAP that NO, there could be no subordination, but instead they chose to process her $200.00 subordination fee that they declined! Incredible!
Anyway, I wanted to bring this to your attention and to caution other loan officers and mortgage brokers about these practices and how they could affect a seemingly easy to close loan and turn it into something else.
Luckily I was able to find a nice high-net worth type loan, a 30 year fixed, 10 year interest only, LPMI loan which will refinance both loans to 100% and keep the payments about the same as they are now.
Thank you for letting me share.
Hi Frederic, This is facinating and I thank you for sharing. I’m checking with my PMI rep because I have NEVER heard of this before and it’s very important information.
Wow! This is a complete new one for me. Thanks, Frederic. So now we have yet another thing to worry about (does the note allow for subordinations?)
On one hand, it seems this must be in the note or disclosed to the borrower in order for pmi to be allowed on the second mortgage. On the other, a lender does not have to allow a subordination to take place (I’m 99% sure). My pmi rep says she’s heard of this, their company doesn’t insure seconds (yet, she said). She promised to get me more info and/or point me in the right direction. I’m having to make friends with pmi reps again! Which is a good thing. 🙂