Lenders Grapple with Subprime Refi's

By O'Sullivan, Orla | ABA Banking Journal, May 1998 | Go to article overview
Save to active project

Lenders Grapple with Subprime Refi's

O'Sullivan, Orla, ABA Banking Journal

Prepayment penalties, which went out of fashion in the Eighties, are being re-evaluated by an industry facing its third refinancing wave in recent years. Putting surging mortgage activity in perspective (an estimated 45% of which is thought to be refinancing), Brian Smith, director of policy and economic research for America's Community Bankers, says, "A lot of our members are reporting that their pipelines in January had as many applications in a week as they had in a month during 1997."

Prepayment penalties won't help lenders whose mortgages currently are prepaying, because a penalty not in the original loan agreement cannot be added in retrospect, says Paul Smith, senior federal administrative counsel at ABA. However, on a home-equity line of credit, where the borrower hasn't used the full credit available, a lender might be able to apply a prepayment penalty, in much the same way that a credit-card issuer can change the terms of the credit, Smith says.

Investors want penalties

Many subprime loans are facing their first refinance opportunity, considering that the subprime market began to flourish when conventional mortgage lending dried up in 1994. Where once subprime loans were regarded as less sensitive to interest rates because applicants had few opportunities to refinance, now there is so much competition among subprime lenders that's no longer true.

The revenue from subprime loans is higher than that for conventlonals because subprime mortgage holders pay substantially higher interest rates.Consequently, secondary-market investors pay a premium for subprime loans-and many are starting to require prepayment penalties as protection of their investment.

In the booming 125% LTV niche (see last month's Mortgage Lending), investors are paying between 106% and 108%, versus par for the paper, assuming that they will receive the higher yield for long enough to justify paying a premium. Subprime paper generally is reported to be fetching between 103% and 106%.

What one thrift executive calls "asset evaporation" is also an issue forlenders holding subprime mortgages. This refinancing wave is the first to be affected by an accounting rule (FAS 122) that requires the institution to book the anticipated servicing value as an asset. (Many of the recently publicized downward revisions of earnings by subprime players reflect paper losses on such servicing.)

John Goga, director of acquisitions with Amresco Residential Credit Corp., an Ontario, Calif., acquirer of subprime paper, said, "For us, prepayment penalties often have as much value as the coupon." Goga was speaking in a session at the ACB/ABA Secondary Mortgage Conference, at which Andrew MacDonald, director of correspondent business at IMC Mortgage Company, Tampa, observed, "There's a lot of churning of subprime."

Goga said, "Our correspondent pricing for subprime loans assumes a three-year prepayment penalty."

On 125s, Charter One Bank, a Cleveland thrift, imposes a penalty of 4% of the loan amount for a loan prepaid in the first year, falling to a penalty of 1% for a loan prepaid in the third.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Lenders Grapple with Subprime Refi's


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?