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Posted by jhurlbut on September 23, 2006, 8:43 pm
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I'm a Real Estate agent and many clients have asked me this question
and it seems as though mortgage brokers avoid it. So I thought I'd try
it here.
When do mortgage brokers decide that a particular loan is deserving of
the dreaded prepayment penalty?
It seems as though there would be added incentive by the lender that
the loan will eventually be sold to to have a prepayment penalty to
assure they would receive a certain amount of interest payments. Is
that incentive offered to the person brokering the loan? Similar to
YSP?
Also, anytime any of my clients have applied for a loan and have been
told they have a pre-pay penalty, I tell them to ask the broker if
he/she will remove it and almost invariably they do. So it doesn't
seem as though the pre-pay penalty is a mandatory item. It definitely
does not benefit the consumer, it does benefit the lender. I'm
assuming it must also be a benefit to the broker.
Any answers would be greatly appreciated.
John
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Posted by Allen Greenspan on September 25, 2006, 1:25 pm
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John,
That is a very complicated question and I will take in on in simple general
terms that may leave out some situations.
1) As a rule, sub prime borrowers have prepayment penalties on their loans,
unless the borrower agrees to a 1% higher rate, thus buying out the
prepayment penalty.
2) When the borrower does not want to pay origionation fees we can add a
prepayment penalty to avoid charging points or fees.
Some lenders say that the prepayment penalty is to the advantage of the
borrower because it protects the borrower from him or her self, prevents
them from refinancing again and again thus stripping out their equity.
Especially true when the borrower has a high LTV or low FICO, then forcing
the borrower to wait to refinance means financial discipline, and deferred
pleasure, ect. Many low fico and high ltv borrowers will refinance every
12-18 months out of necessity.
Thanks for listening.......
> I'm a Real Estate agent and many clients have asked me this question
> and it seems as though mortgage brokers avoid it. So I thought I'd try
> it here.
>
> When do mortgage brokers decide that a particular loan is deserving of
> the dreaded prepayment penalty?
>
> It seems as though there would be added incentive by the lender that
> the loan will eventually be sold to to have a prepayment penalty to
> assure they would receive a certain amount of interest payments. Is
> that incentive offered to the person brokering the loan? Similar to
> YSP?
>
> Also, anytime any of my clients have applied for a loan and have been
> told they have a pre-pay penalty, I tell them to ask the broker if
> he/she will remove it and almost invariably they do. So it doesn't
> seem as though the pre-pay penalty is a mandatory item. It definitely
> does not benefit the consumer, it does benefit the lender. I'm
> assuming it must also be a benefit to the broker.
>
> Any answers would be greatly appreciated.
>
> John
>
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Posted by Jeff Strickland on September 25, 2006, 10:01 pm
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> I'm a Real Estate agent and many clients have asked me this question
> and it seems as though mortgage brokers avoid it. So I thought I'd try
> it here.
>
> When do mortgage brokers decide that a particular loan is deserving of
> the dreaded prepayment penalty?
>
> It seems as though there would be added incentive by the lender that
> the loan will eventually be sold to to have a prepayment penalty to
> assure they would receive a certain amount of interest payments. Is
> that incentive offered to the person brokering the loan? Similar to
> YSP?
>
The Prepayment Penalty is really quite simple. The lenders go after
investors to get money to loan. The lender promises the investor a certain
return on the investment dollars. If the borrower repays the loan early,
then this affects the return to the investors on the dollars they invest.
The lender is holding the bag for a certain sum that will come if the loan
matures to the end of the prepayment pentaly term -- typically 3 years, but
can vary. If the borrower repays the loan in its entirety, or repays more
than 20% (another variable figure) of the Original Loan Amount in any
payment year, then the prepayment penalty will kick in.
If the borrower understands that they will keep the loan for 3 or 5 years,
then they can benefit from ACCEPTING the prepayment penalty in exchange for
a lower interest rate. If I was offering loan dollars, I could offer a
program for 6.125 WITH a prepay, or 6.500 without. The borrower would
probably like the lower payment, but they would be locked into the loan
program for whatever the prepayment period is. If they thought they would be
refinancing or selling the property in less than the prepay period, then the
prepay would be a bad thing. But, if they thought they would for certain
keep the property, then the prepay would not be a burden UNLESS some
unforeseen situation came up.
> Also, anytime any of my clients have applied for a loan and have been
> told they have a pre-pay penalty, I tell them to ask the broker if
> he/she will remove it and almost invariably they do. So it doesn't
> seem as though the pre-pay penalty is a mandatory item. It definitely
> does not benefit the consumer, it does benefit the lender. I'm
> assuming it must also be a benefit to the broker.
>
Well, the prepay will benifit the borrower by giving them a lower rate
because they (the borrower) agree to mitigate a certain amount of the risk
that the lender faces.
A prepay penalty is not a bad thing, it merely sets a requirement to not
sell or extract equity during the prepay period. The vast majority of
borrowers will never be affected adversely by a prepay. A possible exception
would be the borrower that takes an ARM today, and the rates rise to where
they are higher than a fixed rate loan. In this case, the borrower simply
has to do the math, is it cheaper to pay the penalty and refinance to a
lower fixed rate, or pay the higher ARM rates until the prepay period
expires. YOU, as a real estate professional, should have a mortgage
calculator where you can help your clients to see what is happening.
Alternatively, as a Buyer's Agent, YOU should establish a relationship with
a mortgage loan officer at a nearby broker's office, and then have all of
your buyers get filtered through a loan officer that you can talk to and get
on the same page with. Some borrowers are flakey, and your loan officer is
the guy that can help you understand what program the buyer is facing.
> Any answers would be greatly appreciated.
>
> John
>
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Posted by jhurlbut on September 27, 2006, 8:24 pm
Please log in for more thread options Jeff and Allen,
Thanks so much for the replys. That does make sense. The one thing I
don't really understand is that as far as I can tell, when a buyer of
mine asks to have the prepay removed from the loan, the rest of the
terms of the loan do not change. So in Jeff's example, it would seem
that to remove the prepay, the interest rate, or some other fee would
rise? I just have not seen that happen, at least with the broker I do
90% of my business with.
Thanks!
John
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Posted by Jeff Strickland on September 27, 2006, 9:28 pm
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> Jeff and Allen,
> Thanks so much for the replys. That does make sense. The one thing I
> don't really understand is that as far as I can tell, when a buyer of
> mine asks to have the prepay removed from the loan, the rest of the
> terms of the loan do not change. So in Jeff's example, it would seem
> that to remove the prepay, the interest rate, or some other fee would
> rise? I just have not seen that happen, at least with the broker I do
> 90% of my business with.
Then he's shopping the loan to another lender or the rates have improved or
both.
You are correct though. If the prepay is removed, then another quality of
the loan package ought to go up as a result -- either a fee or the interest
rate. One thing that you may not be aware of is if the borrower is right on
the line for income and debt ratio, and it perhaps above where the loan
officer thinks the loan will get approved at. He can take a package to Bank
A and get an approval with a prepay, when the buyer balks, he can submit the
package to Bank B and get an approval with no prepay. Personally, I always
submit to the bank that has no prepay, then submit to the bank that has a
prepay if the first bank gives a denial.
Of course, the loan officer can get a rebate if he gets the buyers to take
the prepay -- the bank pays him more for the same loan if they have an
assurance that the loan will remain for a given period of time. the rebate
could be a quarter or a half point <whatever> and he could simply chalk it
up to experience and forgo the additional rebate and cancel the prepay for
the buyer.
You have to know how to read a rate sheet to find this, but let me give an
illustration. Say the borrower is a good one -- good income, low debt, high
FICO, etc. The loan officer can get the people a 6.250 30-yr fixed, and it
flies throught the automated system he submits the loan on. (The automated
system is geared according th Fannie Mae, and looks at all kinds of stuff
then issues an approval. Or not.) So, the buyers is good, and the automated
system likes the loan. The loan officer makes .500 in fee from the bank for
selling the loan package, then he makes another .250 in fee for tacking on
the prepay, then he charges the buyer a point (1.000 in fee) to arrange the
loan in the first place. So, he charges the buyer a point, and makes .750
(3-quarters point) in rebate from the bank for sending the loan package in.
The buyer objects to the prepay, and you ask them to remove it. The loan
officer says, "what the hell, I'll take a point and a half instead of a
point and three quarters." He comes off as the Good Guy because he
"negotiates" a better loan for his (and your) client, but really he is
simply taking a hit to his fee that he ought not be charging anyway.
Now, if the rates have improved and he shops the loan to another lender, he
might be able to get the .250 back in rebate and still give the same
interest rate. In this instance, he is not taking a hit, he just is doing a
bit of homework.
Back to the rate sheets. When I look at a sheet, I have a matrix of rates
and fees that vary according to the lock duration. I can give the buyer
6.750 and get so much rebate that I can pay the closing costs for the buyer.
Or, I can give the same buyer on the same day 6.250 and get a small rebate
and the buyer pays closing costs, or I can give 5.750 and get no rebate; in
this case the buyer pays more points plus all closing costs. One has to do
the math -- easily accomplished with a Mortgage Calculator -- to see if the
buyer is best served with the loan that has high front end costs or no front
end costs. Basically, if one planned on living in the home for 30 years and
never refinancing, then the high front end costs would be better because the
payment would be lower and the total interest would be much lower over the
life of the loan. But, if the buyer knew he was going to sell again in a few
years or refinance, then the low front end cost loan could work out better
because he could conceivably earn more on the money he would put to the
front end costs if he left that money in his investment portfolio. As a loan
officer, I generally tended to put my borrowers in the middle -- they paid
closing costs and I took the small rebate for my commission.
PS
I pulled the rates out of my ass to illustrate the theory, I have no clue as
to whether I could actually offer a loan today at these rates.
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