|
Many people who take cash out of their house when they refinance their mortgage will have to pay more starting Feb. 1.
Fannie Mae, a quasi-government agency that buys mortgages from lenders and sets terms for much of the mortgage market, has discovered that people who borrow significantly more than their existing loan balance when they refinance -- called a cash-out refi -- default at a higher rate than people who don't.
To make up for this added risk, Fannie Mae is increasing the fee it charges on certain cash-out refis. Lenders generally pass these fees on to borrowers, who can pay them up front or spread them out over the life of the loan. At most, the increase will cost an extra 0.5 percent of the loan amount, or 0 for each 0,000 borrowed. Spread over 30 years, that's about per month (including interest) per 0,000 in loan amount, says Fannie Mae.
During the past four or five years, Fannie Mae has increased the amount it will lend on refinanced mortgages to 90 percent of the home's value from 70 percent.
Taking advantage of the increase and record low interest rates, homeowners are refinancing like crazy. About half are taking out cash out, and that's helping the economy.
But Fannie Mae has discovered that people who borrow 20 percent or more of their remaining loan balance when they refinance are three times more likely to default than refinancers whose mortgage grows by 3 percent or less.
Rather than lending these people less money, Fannie has decided to charge higher fees.
On Feb. 1, Fannie will raise the fee on cash-out refinance mortgages secured by single-family homes with high loan-to-value ratios when the borrower is taking out more than 2 percent of the new loan balance or ,000, whichever is less.
The fee rises to 0.5 percent from zero on homes with LTV ratios of 70.01 to 75 percent, to 0.5 percent from 0.25 percent on homes with LTVs of 75.01 to 80 percent and to 0.75 percent from 0.5 percent on homes with LTVs of 80.01 to 85 percent.
The fee on homes with LTVs of 85.05 to 90 percent remains at 0.75 percent.
The higher fees also will apply to new loans that consolidate a first mortgage and subordinate liens, such as a second mortgage or home equity loan, if the subordinate lien wasn't used to buy the house.
Tom Lund, senior vice president with Fannie Mae, says the fee increase is "minimal. We don't believe it will have any impact" on homeowners' ability to refinance.
Kevin Clay, a San Carlos mortgage broker, says Fannie's new fees "are not going to have an incredible effect on access to credit." But they might cause consumers to choose different types of loans. For example, some people may be better off getting cash with a home equity loan instead of refinancing.
When Fannie makes a change, most lenders follow.
MILBERG VS. MUNIS: San Diego law firm Milberg Weiss, best known for suing Silicon Valley companies on behalf of shareholders, is taking aim at municipal bond brokers, alleging they charge unjustifiably large, poorly disclosed commissions in the form of spreads and markups.
Last week, the firm filed a suit in San Francisco Superior Court on behalf of Kevin Olson of San Francisco.
The defendants include Salomon Smith Barney, UBS Paine Webber, Bear Stearns, Merrill Lynch, Morgan Stanley, Prudential Securities, Bank of America and Charles Schwab.
The suit alleges that the defendants "systematically employed an unscrupulous and fraudulent practice of charging markups in excess of 1% and sometimes greater than 5% and far in excess of what defendants charged for equity transactions of similar size, risk and dollar amount."
It also says the defendants failed to disclose their profit, another unfair business practice.
The suit applies only to previously issued bonds trading in the secondary market, not newly issued bonds, where spreads average just 0.7 percent.
Olson considers himself an advocate for municipal bond investors. His Web site posts daily pricing information for bonds that traded at least three times. The data come from the Municipal Securities Rulemaking Board.
For each bond, the site shows the highest and lowest bid (the price at which a customer sells to a broker) and the highest and lowest offer (the price at which a customer buys from a dealer). The difference between the bid and offer is the spread or markup, which is the broker's commission.
Olson puts a red flag next to bonds where the best bid and best ask price exceed 4 percent. Each day he highlights the 10 highest markups. Wednesday's 10 worst spreads ranged from 6.3 percent to 15.3 percent.
His site also lets investors plug in a bond they bought and get prices for comparable bonds.
Although municipal bond spreads have come down in recent years, they're still far higher than they are for other securities.
Better disclosure of muni bond trades has helped, but it's still not good enough, Olson says. The MSRB data do not include bonds that trade infrequently, and they do not identify which firms handled the trade.
The MSRB, which regulates muni bond brokers, is run by muni bond dealers.
Olson says he has been badgering brokerage firms to provide better disclosure and lower commissions, but has run out of patience. So he approached Milberg Weiss about filing a lawsuit.
Milberg Weiss advertises itself as "the world's leading class action law firm." But this suit is not a class action. It is called a private attorney general complaint filed on behalf of the general public.
Olson couldn't file a class-action suit because he's not an injured plaintiff, and he's not seeking monetary damages. He's asking that the defendants be enjoined from charging excessive fees and pay his attorney's fees.
Stan Mallison, Olson's attorney, says it's "quite possible the suit could be turned into a class action."
Olson would like to see muni bond spreads below 1 percent. "We're going to show at trial an average spread between 2 and 3 percent," Mallison says.
Zane Mann, publisher of the California Municipal Bond Advisor, would like to see better disclosure and lower spreads. But he wonders if the suit is a self-serving attempt by Olson to gain publicity and money and by Milberg Weiss to recruit plaintiffs for a class-action suit that would generate "a zillion dollars" in fees.
Olson says he's running the site out of his pocket and would like to get financing and turn it into a nonprofit organization.
"What I'm doing is for the public benefit," he says.
Glen Mathison, a spokesman for Schwab, says, "We feel the lawsuit is without merit. We have the controls in place to ensure our bond pricing has been fair."
|
