My mortgage refinancing experience post mortgage crisis delivery fees

This is part one of a series of what I learned by talking to a mortgage broker last week.

I stopped by my credit union to check into refinancing my mortgage last week. The rates were low and with the likelihood that the fed was going to drop rates again, I decided this might be a good time to refinance from a 30 year fixed to a 15 year fixed interest rate mortgage.

I asked the mortgage broker many questions about the current mortgage market. She passed along some interesting information including the details about a new mortgage delivery fee. I have no plans to cash out, but I continued to ask questions around all options to learn more information. The mortgage broker showed me a large binder with a new set of guidelines from Freddie Mac that determine the interest rates that she can offer. There will be even tighter restrictions coming out on June 1st, 2008, so rates will likely rise even further for higher risk borrowers soon.

In the past, the loan officer told me that she could nearly always quote one rate and it was applicable to nearly everyone who walked in the door. That to me indicates another problem with the mortgage market — too many borrowers were treated as equal credit risks when they were not.

This information applies to Freddie Mac (FRE) mortgage loans which the credit union uses to back their loans. If you credit score (FICO) is above 680, there is no delivery fee on non-cash-out refinancing. I have a FICO score above 680, so there is no issue with the delivery fee for me. The rates start to rise about the published rate as the credit score drops below 680.

Cash-Out Mortgage Delivery Fees
There are additional mortgage delivery fees based upon the LTV (loan to value) ratio. To simplify somewhat, if the loan is a 70% – 80% LTV ratio, the delivery fee is 0.5%. On a $100,000 loan, that would be a fee of $500. If the LTV ratio is 80 – 90%, the fee is 3/4 of a point or $750 per $100K borrowed. That is a very expensive fee for a borrower needing to cash out $10K to pay off some credit card debt. Of course, most P2P loans have an origination fee, but on a $10K loan, you could expect to pay 0.5% to 2% or $50 to $200 in origination fees. The origination fee savings will be offset because you will likely pay a higher interest rate on a P2P loan and the interest paid is not deductible from your federal income tax. Therefore, the equation is complex for me to give specific recommendations, but all these fees may make P2P loans more attractive to borrowers with good credit scores.

I asked about also applying for a HELOC
I asked about applying for HELOC in addition to refinancing the first mortgage. The broker advised applying for the HELOC after refinancing the mortgage, but within 120 days because they would not need to pull an additional credit report within 120 days. That would save a hard-pull on my credit report which would impact my credit score. These additional fees are going to make P2P lending options such as Prosper.com and Lending Club, more attractive to borrowers who would have traditionally applied for cash out refinancing — even if the borrower has good credit.

BankRate confirms what the mortgage broker was telling me. The article also mentions “Risk-based pricing has arrived.” Interestingly, the new new risk tables (see Freddie Mac’s) remind me of the Lending Club rate tables. Freddie Mac has posted some long PDF files (1, 2) that explain the details of the delivery fee calculations.

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