A Refinancing Alternative? NYT 1-2-11

...Refinancing is too costly and I currently have a less than 5 percent interest loan.

Just call your bank's custome service number - recasting is pretty standard stuff.

Also, you could refi into a 5-1 or 7-1 ARM for a lower rate (sub-4%), which would considerably lower your payments when coupled with your lower principal balance. I would only do this is you felt reasonably certain about paying off the loan in the next 5-10 years.

The term for the modification you want is "recasting". It means recalculating the monthly payment based on changes to other loan attributes - in your case, the remaining principal. Whether Chase will accommodate this particular type of modification, and how much he bank will charge, are questions only Chase can answer. If your loan, or the servicing on your loan, has been sold to another entity, Chase may not have the right to recast.

Recast is standard for ARMS. I've not seen this occur on fixed rates. The Times article discussed that it may not be available for securitized loans. I've alwasy thought the recast was one of the few benefits of owning ARM over FIXED. Has anyone actually done this on a fixed?

I just sent an email to the customer services department of Chase. I'll let you know their response. I am told to expect a response in 2-business days.

And don't forget that before the bank can do any kind of modification to your mortgage, you'll likely need your co-op board to sign off on it.

A coop board would be nuts to not sign off on this. No new debt is created and borrower cash flow is improved.

And yet, they still need to sign off on it.

@Riversider - some co-ops would prefer to keep up the same rate per month with the view to paying off the mortgage faster.

Our co-op has zero mortgage and enough people in the building want to keep it that way, it was one of the reasons we purchased here.

While coops have their benefits, they come across more as a an exclusive club and highly controlling. I'll take the Condo. Graucho capture the feeling best when he said, "I would not join any COOP that would have me as a member"

The CO-OP angle is an interesting one. I was hoping, if Chase agrees to the "recasting" -- if doable with fixed rate mortgage, I would pay essentially the same amount monthly but more would go towards Principal. This would save me money and lead to a faster payoff. Any CO-OP should like this scenario, no?

JEM, You have it backwards. The recasting option takes you back to the original maturity date of the mortgage. Having prepaid the mortgage you were set to retire it early. Curtailment lowers the payment and pushes the maturity back to the original intent.

I mean recasting lowers the payment....

More words that mean nothing.

Riversider, thanks. I do have much to understand about this process. If this goes through I could pay the additional monthly saving towards principal ONLY each month and that should have the effect of paying it off earlier with savings above leaving things "as is". I am assuming the calculated monthly interest would now be lower since the principal on which it is based is lower. Do I have that right?

"Also, you could refi into a 5-1 or 7-1 ARM for a lower rate (sub-4%), which would considerably lower your payments when coupled with your lower principal balance. I would only do this is you felt reasonably certain about paying off the loan in the next 5-10 years."

This is correct, the only thing I would add is that with an ARM, as you pay down additional principal, the monthly interest charge is reduced.

I don't see why the bank would agree to this -- what's in it for them?

ali r.
DG Neary Realty

Bank gets the same rate of interest, but gains duration exposure.. typically a negative.

what's incredible is that your board didnt have to sign off in the first place on you prepayment scheme. what's further incredible is that you began prepaying without any clue what you were doing.
scary, frankly.

The board doesn't know or care about extra principal payments.

The lender's statement or website probably says how extra funds are applied. Or JEM could've just paid an extra few hundred one month and saw what happened to that before proceeding.

As it is, no big deal. It's not as if the money's gone.

it seemed from the original post that JEM was referring to the "coop's loan", as in the underlying mtge...if he is referring to a mortgage on an individ coop apt, the board would encourage prepay or payoff and would require no clearance to engage those processes--the board should care very much to understand clearly in advance any changes, other than prepay, to the financing of individual apts

"I don't see why the bank would agree to this -- what's in it for them?

ali r.
DG Neary Realty"

It can often be profitable. Suppose you're 5 years into your 7.0% 30-year mortgage, and you pay down enough to shrink the term to 15 years. You ask the bank for a recast to 25 years. What should the bank do?

The credit risk for the bank is virtually the same: your equity in the home is quite large due to the early payment, so the rate of principal payoff matters little. So it becomes a question of interest. Suppose at a 15-year term, treasuries are running at about 4.0%; at a 25-year term, 4.5%. Let's call the credit / pre-payment / etc. risk at 0.5% (this is the premium charge by Freddie/Fannie debt over treasuries).

So the lender is collecting 2.5% beyond rough cost of capital over a 15-year term (7.0% - 4.0% - 0.5%). That is mucho good for the lender. It is worth approximately 2.5% * 15 = 30% of the principal owed over a market loan (it's actually a little less, but not important to the point here). You come along and offer to over-pay 2.0% (7.0% - 4.5% - 0.5%) for 25 years. That is muchoer gooder. It's now approximately worth 2.0% * 25 years = 50% of the principal owed over a market loan. Bank says "yes", you go away dumb and happy.

Note that even in the case of pre-payment (e.g., selling your home after 10 years), the bank makes out better with the recast. They're collecting that same over-market 7% interest on a larger loan balance as less of the principal is paid off with a recast.

If there are any mortgage traders lurking out there, I'd be curious to see your assessment of that analysis.

standard for fixed rate mtgs is that the number of payments is lessened as a result of prepay

for arms, if borrower prepays at times other than when the mtg adjusts, number of pmts is lessened. for amts a borrower prepays at time an arm adjusts, the borrower may choose btwn a lesser number of payments of same amt, or a lower payment for the same number of payments as originallly defined.

JEM, unless he refi's, will always ahve the same payment amt for his 30 yr fixed--cmb will not budge on this, trust me

if infact he is referring to a mtg he has on his apt---and not "the coop's...mortgage" as he posted originally

I am referring to an individual apartment in a CO-OP building. Sorry for confusion. I know there is a debate about whether to place any extra cash in mortgage pay-down vs. other investments. I suspect other investments probably win but I sleep better using it towards the pay-down. Sleeping better is why I would not consider an ARM even though that may be the "better route" if I plan to pay off in the next 5 years. One just never knows what life has in store, so I'll stick with fixed.
Inonada you're scaring me. I like the idea of walking away happy.... I don't relish the idea of the 'dumb" part...
Wbotton, maybe I should be sticking with what I have, simply continuing to pay extra when I can and look forward to finishing the payments early with saving based on the early payoff.

JEM, you are essentially saying that you don't trust yourself with your own money. That's, I guess, a fine thing to say, but that's what you are saying. Lots of people make these decisions all the time, but you should be aware of just how much money you are giving away because you don't trust yourself.

SkinnyNsweet you may be right. I think lack of knowledge, and maybe being too cautious, play a large role. I am learning just how much I don't know. I am working on changing that.

JEM, paying down or recasting is not necessarily a bad choice. I can give you my thoughts if you give more details. Is the equity high (say, more than 40%)? What is the term left on the loan if you continue to pay the full amount? What is the rate on the loan? Is it a jumbo?

Ali, if you don't get what inonada just said about prepaying a mortgage, you have no fking business selling RE. Go back to writing fluff pieces and self publishing and telling everyone you are a writer.... I guess in the same vain, my son's kindergarten teacher is a "writer" and not an overpaid "nanny." Or the stewardess is a safety flight coordinator and not a waitress on a bus with wings....

but do go on about 30yrs excellent credentials and your ability to line your pockets for turning keys.

YOU SHOULD have a PROFESSIONAL opinion as to MAGNITUDE, DURATION and POSSIBLE OUTCOME (PEAK TO TROUGH). OR r u a bubble denier too?

I'm on the other side of the fence on that one, w67. I don't think brokers should play financial advisor at all; they should just broker transactions. They should offer their views on how properties line up relative to the market. The problem is that they often end up playing financial advisor because they are asked, or else just excited to discuss it.

JEM, I think we have enough info already. Since you have a sub-5% 30-year, that puts your loan at a 2009 or 2010 vintage. You probably put at least 20% down, and paid off another 20% (you said a quarter of the balance), so you have a large chunk of equity making the credit risk minimal. For the sake of illustration, let's say your loan is conforming at 4.75%. By paying down that quarter and keeping your payments flat, I think you've essentially made your loan term only 18 years instead of 30 years. Current 15-year mortgages run at 4.25-4.50% while 30-year ones are about 5%.

So, your early payment took you from a slightly below-market loan (30-year at 4.75%) to a slightly above-market loan (18-year at 4.75%). This option was exercised by you. The bank is now holding a slightly above-market loan; if they allow you to recast back into 30 years, they'd be converting their above-market loan to a below-market one. I would imagine they should not want to do this, but am curious to hear the outcome.

On your decision to pay down the loan, you've mostly put your money in a long-term bond. It's a fine choice along the risk-reward tradeoff options compared to cash, nothing obviously wrong with the risk-reward tradeoff to me as an investment. The fact that you did so at the cost of giving up a slightly below-market loan is small compared to other considerations IMO.

Apparently the Grey Lady is recycling a WSJ piece from two months ago..(and the strategy is not promoted or encourage)

At J.P. Morgan Chase & Co.'s Chase Home Finance unit, less than 200 mortgages a month are recast out of 10 million home loans outstanding, a spokesman says. At Bank of America Corp., about 200 to 300 a month recasting requests are received out of about 14 million home loans serviced by the company, a spokesman says. Neither bank has seen increased demand.

Getting permission to recast a loan can be tricky. The loan must be in good standing, and you need to secure permission from the loan servicer, who may or may not be the original lender. If the loan has been sold to an investor, the servicer also must secure its approval.

Since nearly two-thirds of all outstanding mortgages have been sold to investors via mortgage-backed securities, some homeowners could find this step difficult, especially those with subprime and "jumbo" mortgages. (Jumbos are loans that are too big to receive government backing through Fannie Mae, Freddie Mac or the Federal Housing Administration.) If approved, the borrower will need to sign a modification agreement, a legal document recording the change of contractual terms.

Each lender sets its own fees and requirements. Chase requires a minimum $5,000 principal payment to recast a loan and charges a $150 fee, for example. Bank of America generally charges $250. It suggests at least $1,000 be paid toward the principal, but has no minimum.

http://online.wsj.com/article/SB10001424052748704791004575520313350677180.html?mod=googlenews_wsj
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The key point is the servicer. Recasting increases the duration of the remaining payments and backs out the curtailment effect, extending the loan back to it's original maturity. Deciding this is not just whether the rate is above or below market, it's that the longer duration makes the servicing more expensive to hedge aided by the fact the borrower still has the very same refinance option available to him.

So you have a longer duration loan with more gamma risk as well, a not very attractive proposition. I suspect banks are more likely to agree to this arrangement if they feel not doing so puts the mortgage at risk(i.e. the borrower cannot afford the old payment).

So the lender is collecting 2.5% beyond rough cost of capital over a 15-year term (7.0% - 4.0% - 0.5%)
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Well the loan in question was 5%, but this is why I disagree with the approach. The bank is most likely funding this loan with CD'S(essentially floating rate risk as this is short term financing), so the bank must do one or a combination of the following. If they are not funding with CD'S they are most likely using other short term debt which again comes back to short term floating rate risk.

1)Take a chance that the loan rate exceeds capital costs
2)Utilize a swap to convert the fixed mortgage exposure to float or do likewise with capital costs. The fact that the mortgage amortization schedule can be curtailed once again makes this more expensive, but a "balance certain" hedge is possible but adds yet extra cost.
3)Purchase a Cap limiting exposure if rates exceed 5% but since forward rates already project this, this is expensive up-front money.
4)I've already discussed the additional hedging cost regarding servicing rights.

Since the recast program includes very little in new fee income for the lender/servicer I can easily see they are not encouraging this option.

Most likely the loan is sold and the servicer is only concerned with hedging the rights, but included info in case they have retained the loan.

Who cares how they are funding / hedging the loan? The point is that they are already doing that shit at, say, 4.5% for a 15-year term and 5.0% for a 25- or 30-year term on new loans. They've presumably priced those new loans at equal risk/reward profiles, so extra money on top of that represents pure extra juice with no additional risk beyond that already price into 4.0% or 4.5%.

The more likely reason for the rarity of the situation is that for the recast to work for the lender, the borrower needs an interest rate higher than prevailing rates (like 7%). If this were the case, the borrower would simply refinance rather than pay down and recast. Even if equity had been eaten up by losses, they are bringing cash to the table, which opens up the refinance option.

Inonada and Riversider thank you both for the information. I will check how may more years of payment is currently pending. Right now I am thinking I may just continue to pay down the loan with extra payments to principal only. However, I'll see what Chase's response is....

bingo from ionada:

1)lower rates lead borrower to refi--higher rates disincent bank to accomodate recast

2) if your finances are reasonably strong, why not just pay down from time to time, and keep your original mtge, lessening the number of pmts you will make? you will save interest greater than you can receive int the market for an investment as safe as yourself

blather from riverblather:

no idea wtf he said.....again

Response from Chase:
I am writing in response to your Internet inquiry to Chase
about your home mortgage loan.

Sending an additional principal payment does not change
your monthly mortgage payment amount; however, it reduces
the term of your mortgage. You may be eligible to change
the amount of your monthly payment by processing a recast
on your loan. A recast allows the principal and interest
portion of your payment to be reduced after a large
principal payment is made. The calculation for the new
payment is based on the new principal balance, the
interest amount and the remaining term. A recast does not
change the existing rate, term or escrow payment.

To request a recast, please mail or fax a written request,
along with the loan, phone, and fax numbers to:

XXXX

You will receive a response by standard mail within seven
to ten days.

Chase's goal is to provide the highest level of quality
service. If you have questions about your mortgage,
please contact Customer Care

..... This is exactly what you have been telling me. Don't know if this is worth
further exploration. I may request the new monthly $ and decide after that.
What do you think?