Refi Madness

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RickShargaThe offer came in an envelope that looked like it was from a government entity, perhaps the Department of Treasury.

In bold type, the envelope told me that I qualified for a “new government program” that would save homeowners like me thousands of dollars by allowing me to finance at today’s historically low interest rates. It was “urgent” that I respond “immediately,” since the program would expire soon. All I needed to do was call a toll-free number, visit a website or fill out and mail back the enclosed form, and I would be on my way to financial freedom.

There was only one problem with this scenario: None of it was true.

As most people in the mortgage industry know, there are no new government programs aimed at saving borrowers thousands of dollars. The program so breathlessly described in the promotional mailer was, in fact, the Home Affordable Refinance Program (HARP), which hardly qualifies as “new,” since it began in March of 2009. HARP was created to allow underwater borrowers (borrowers who owe more money on their homes than their homes are worth) to refinance at current market rates, often without the added burden of mortgage insurance. The program, which has been modified to allow more borrowers to qualify, also isn’t expiring any time soon; it’s scheduled to end on December 31, 2015.

Besides the fact that the program isn’t new, or about to expire, the other problem with the offer is that I don’t meet either of the major criteria that would allow me to qualify for HARP. I have – fortunately – never been underwater on my loan, and thanks to explosive home price appreciation in California, have seen my equity increase dramatically over the past few years. My loan is not, nor has it ever been, owned by Fannie Mae or Freddie Mac. And besides all of this, my interest rate (2.85%) is below anything I could hope to get from a HARP refi, so I also wouldn’t be able to save thousands of dollars.

Most of this is information that the mortgage company could have found out about fairly easily, given the wealth of public record data available. So I’m left wondering whether they had the information and purposely sent me a misleading offer, or simply decided not to bother screening the borrowers they sent the mailing to, knowing full well that a fairly high percentage of them wouldn’t be eligible for the “new government program” they “qualified” for. Neither is a terribly attractive option, nor the kind of marketing approach that will rebuild the trust and confidence in the industry that has been lost during the housing boom and bust, and the long, bumpy post-recession recovery.

This particular offer came from a small, relatively new non-bank lender, obviously looking to gain market share however it could. But sadly, more established entities aren’t exactly doing the kind of marketing their mothers would be proud of either.

Case in point: my mortgage servicer, a long-established provider, part of a very large, well-regarded, publicly-traded company, also sent me a letter encouraging me to refinance my loan shortly after I received the faux HARP offer.

This letter encouraged me to refinance my adjustable rate mortgage (ARM) into a new 20-year fixed rate loan since “interest rates are rising.” The letter went on to say that in the case of my particular loan, my rates could go as high as 11.38% over the life of the loan, and that by refinancing into a loan with a 4.48% APR, I could save over $2,000 a month, or almost $25,000 a year. If true, that would work out to almost $500,000 in savings over the life of the loan.

Unfortunately, most of this wasn’t true either.

While it’s true that my interest rates could, eventually, go as high as 11.38%, there’s an annual cap of two points, and my annual adjustment sets the interest rate on my loan at LIBOR plus 2. So my interest rate for the past year has been 2.85%. Based on today’s LIBOR rate of about 1.10%, my rate would go up to about 3.1% at the next reset period – a far cry from 11.38%, and still more than a point better than the 4.48% APR offered by my servicer. In fact, even if interest rates began to go up steadily (something virtually no one is predicting), it would take five years of consecutive max-level interest rate increases to get me to the 11.38% threshold.

But it gets worse.

In order to estimate my “savings,” the servicer did the calculations based on the maximum 11.38% APR and the amount I owe on the loan today. That, frankly, is an impossible combination: There’s no way my loan can reset to the highest possible rates in less than five years; and there’s no way that I won’t have paid down a significant amount of the principal balance on my loan over that period of time.

Here’s how far off the calculations are: If my APR goes up to 3.1% in 2015, my payments will still be over $600 per month lower than the refi offer; if the APR goes up by the maximum two points in 2016, my payments will still be almost $200 per month lower than the refi offer. If the rates go up again by two points in 2017, the refi offer – finally – would be a better deal, saving me about $350 per month – but nowhere near the $2,000 a month “savings” I was promised. Assuming that the APR continues to go up by two points a year, and assuming that I’d be paying off exactly the same amount of principal balance every year, my loan payments would peak in 2019, but still be $800 less per month than in the horror story scenario presented to me by my loan servicer.

We all understand that this is largely an academic exercise – I’ll obviously refinance at some point when interest rates start to increase significantly enough for it to make economic sense for me to do so. But now there’s virtually no chance that I’ll refinance with my servicer’s company, because I’m left to contemplate these horribly unattractive possibilities:

>> The servicer was purposely misrepresenting the terms of my loan and presenting me with false information

>> The servicer didn’t understand the terms of my loan, or how the reset periods worked, and accidentally presented me with inaccurate information

>> The servicer is just really, really bad at math, and was hoping that I wouldn’t notice

None of these inspires me with great confidence, nor do they encourage me to do further business with this servicer. So neither of these companies will get my refinance business when the time comes.

But more troubling to me is the prospect of what’s happening when other borrowers – people who haven’t spent years inside the industry, or who don’t understand the fine print in their loan documents – receive offers like this. And what these types of offers do to the reputation of the industry in general.

How many borrowers responded to similarly-worded “new government program” offers only to be disappointed? How many blindly followed the advice of their lender or servicer to refinance their ARM now, since “interest rates are rising” only to pay hundreds or thousands of dollars that they didn’t need to – and shouldn’t have been tricked into paying? How much damage are rogue players causing to the reputation of the majority of lenders and servicers who try to – and want to – do what’s right for their customers?

Many people in the industry, with some justification, would like to be able to turn the page on the boom/bust/meltdown saga, and move on to the next chapter of the market’s recovery, unencumbered by needless legislative restrictions and strangling regulatory constraints. But trust, once broken, is difficult to recover. Especially when the behavior that caused the breakdown in trust looks like it might be coming back.

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