Millions of refinance loans fueled by rock-bottom mortgage rates are squeezing mortgage lenders’ profits as homeowners refinance into loans with lower rates, triggering prepayments on existing mortgages.
How the Refinance Wave is Hurting Lenders
When a homeowner refinances, the lender gets paid off for the existing loan, but with historically low interest rates, many homeowners are refinancing into mortgages with lower rates than their existing loans. This has driven up the prepayments, especially for loans that were originated when rates were higher.
The resulted prepayment penalties and the loss of interest income have eaten into lenders’ profits and, while the refinance wave has been a boon for homeowners, lenders are hurting.
Ginnie Mae to the Rescue?
The federal agency Ginnie Mae, created in 1968 to boost affordable homeownership, has taken steps to help lenders during the crisis. Ginnie Mae started a pilot program in September 2004 to ease the burden that prepayments cause lenders. The program, called the Extended Mandatory Delivery Commitment Freeze, was an instant success and was set to expire in September 2005.
The Freeze
The freeze alters the way that Ginnie Mae handles prepayments. Lenders typically must pay Ginnie Mae each month for any prepayments they receive on loans they have sold to the agency. The freeze allows lenders to instead to put the prepayment in a holding account with Ginnie Mae.
The Benefit
Lenders typically must distribute their earnings to investors each month. But when prepayments are dumped into the holding account, lenders don’t have to share that income with investors, thus helping lenders ride out the prepayment storm more easily.
The Future
It is still to early to say whether Ginnie Mae’s program will help lenders in the long run, but it has provided some relief and has bought lenders some time to figure out how to deal with the refinancing crunch.
Kind regards
J. Ross
