Magazine article American Banker

Bankers Debate Merits of 'Penalty' Mortgages

Magazine article American Banker

Bankers Debate Merits of 'Penalty' Mortgages

Article excerpt

Paul Mullings, president of First Interstate Residential Mortgage Corp., likes the two-month-old ARM his company is offering.

Since August, Mr. Mullings and his Pasadena, Calif-based company have offered borrowers an adjustable-rate mortgage with a penalty for prepayment, known as a call-protected mortgage.

In exchange for a lower interest rate, homebuyers may not refinance for a designated period without paying a penalty.

A Nationwide Trend

"So far, no major resistance," Mr. Mullings said.

That's good news to other lenders.

From New Jersey to California, bankers are considering call-protected mortgages, following the lead of San Francisco's Bank of America and others that have already instituted prepayment penalties.

With loans churning at a record pace, lenders are looking for ways to slow refinancing.

Freddie, Fannie Not Receptive

Still, First Interstate is an exception. Most lenders will not, offer call-protected Mortgages until Fannie Mae or Freddie Mac agrees to buy the loans. And so far the agencies say no.

Instead, First Interstate holds call-protected mortgages in portfolio.

Cristopher J. Sumner, president of Crossland Savings Corp., would like that option. He had thought about instituting call-protected mortgages, but backed away because he could not hold them in portfolio and Fannie and Freddie were not buying them.

He thinks the time for call-protected mortgages was at the beginning of the refinancing boom.

Loss Cuts Anticipated

"The cow's already out of the barn now," he said from Salt Lake City. …

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