The face of the fixed-rate mortgage is about to change amid Countrywide Home Loan Inc.'s much talked-about new no-refinance loan program. But the question of how big a player the program will be in the secondary market remains a mystery.
Dubbed the eEasy Rate Reduction Plan, the initiative is available to all borrowers who apply for a fixed-rate conventional loan. As interest rates decrease, a borrower will not have to file new paperwork to take advantage of the lower rates or miss out on an even lower rate while the paperwork is being processed.
All it will take is a phone call or a visit to Countrywide's Web site to complete the process. Rates can be changed as often as the borrower chooses, without extending the term of the loan. Also, if the change is requested before the 25th of the month, the new rate will take effect the first of the following month. However, the product is available for an up-front fee of 2.5 points, and each subsequent rate change is subject to the 2.5% fee.
Observers, though, are skeptical as to whether customers will opt for this fee. "I wonder how many borrowers are going to pay up two points to have this ability, when it's so easy to refi your loan anyway, over the Internet or wherever you want to do it at no cost," said one researcher. "I'm not sure why you would pay up that much, but maybe they know something that I don't."
Clif Ulrich, managing director for product development at GMAC-RFC agreed. "Two-point-five points seems a little steep for this," he said. "Other than the fact that this is accessible through the Web, I didn't see it bringing a lot of advantage to the customer. Our question is whether a transaction like this when you're looking to make a serious financial decision is one that is best made by easy Web access versus consultation with a customer service representative."
However, Laurie Goodman, a managing director at PaineWebber, provided some justification for the fee. "The 2.5-point cost of the loan modification is considerably less than the refinancing costs incurred by a borrower with a small balance, and considerably more than the refinancing costs incurred by a borrower with a larger balance," she said.
The Secondary Market Problem
"This is a very interesting product that has generated considerable discussion from MBS market participants," said Goodman. This discussion ranged from how the program will be structured in the secondary market to how it will affect existing to-be-announced (TBA) pools.
A representative from Countrywide said that because of the uniqueness of the product and to "maintain competitive position," Countrywide is not disclosing how the loans are being sold into the secondary market.
Goodman alluded to Fannie Mae being a major player. "They [Countrywide] would not rationally enter a program of this magnitude without third party agreement to buy these loans," she said. "Given the quantity involved, and the lack of a secondary market, any investor must be a very large buy-and-hold institution. Fannie Mae is the logical candidate."
Representatives from Fannie Mae would not comment on the plan.
"I think that if they won't comment, that's kind of peculiar," said Ulrich. "It almost makes me wonder why there's this secretiveness since Fannie Mae's customer is also the mortgage banker that deals directly with the consumer. You would think they would be wanting to openly discuss how they plan to structure this product."
Where Do They Belong?
It is a general market consensus that eEasy Rate Reduction Loans do not belong in conventional TBA pools. "I don't think that's good delivery for regular TBA pools. They'd have to set up a separate prefix for these," said Dale Westhoff, head of MBS research at Bear, Stearns & Co. "I would assume they would set up a separate program for these rate-reduction loans, and it would allow the coupon to reset."
"The program will only have small impact on the TBA market," added Goodman.
She further stated that the program, as it currently stands, should not affect liquidity, but could if the plan was expanded. "We do believe that both Countrywide and Fannie Mae should be aware of the probable impact that further expansion of this program could ding TBA liquidity."
Many also hinted that this program is the next step in the industry's dealing with prepayment speeds and making refinancings easier for the customer. "This direction of helping the consumer deal in the marketplace and the complexity of refinance is really on everybody's plate," said Ulrich. "Our customer group is the mortgage banker, and we've been working with our mortgage bankers and continue to, to find easier ways to have the transaction work for the borrower."
Goodman agreed. "This is the next step in improving refinancing efficiency," she said. "While these eEasy Rate Reduction Loans will not be in TBA pools, there is no way one can ignore the trend toward more efficient exercise of the prepayment option."