Although mortgage rates are still at historic lows, they’ve recently risen about a point and are expected to continue rising for the foreseeable future.
That means the wave of refinancing that dominated the industry during the last several years is winding down.
Still, there’s a substantial group of homeowners who would benefit by refinancing: people with houses that are “underwater” (they’re worth less than what’s owed on them).
Purchased at peak prices and interest rates during the boom, these properties have declined in value and owners have been unable to qualify for refinancing under standard lender guidelines.
The U.S. Treasury’s Home Affordable Refinance Program assists homeowners in this category whose mortgages are owned by Fannie Mae or Freddie Mac. But what about the rest?
Your credit union probably retains a number of these mortgages in your portfolio. You’re not particularly worried about them because members consistently make their payments. Still, these mortgages represent a significant risk to your credit union.
Even if the member is paying a higher interest rate, the risk of default is greater. Unemployment remains a persistent problem across the country, and your member with the good track record could be just one downsizing away from a default.
Your credit union is also missing an opportunity to help members improve their financial situations and reaffirm their loyalty through more business and glowing referrals.
How can you help these members take advantage of low mortgage interest rates before it’s too late? And how can you reduce your exposure to the risk they represent?
A key question is whether these homeowners’ mortgages carry mortgage insurance. If they do, then a refinance-to-modification (RTM) option could be the best way to meet these goals.
RTM programs have been created by all of the major private mortgage insurers to assist credit unions with insured mortgages on underwater properties in their portfolios. Each mortgage insurer has developed specific RTM program guidelines for the loans they insure. You should identify the mortgage insurance provider for each loan and review those guidelines.
Essentially, an RTM option allows eligible members with insured loans to refinance into lower-rate loans, with the mortgage insurance provider modifying its in-force certificate (rather than issuing a new one).
To qualify for an RTM, the loan must be:
The new loan must also improve the borrower’s financial position.
“Same lender/servicer” is required, meaning that the insured lender or servicer of the new refinance loan must be the same as the insured lender/servicer of the loan the mortgage insurance provider currently insures.
The mortgage insurance provider retains the existing coverage with the same premium rate.
Working with mortgage insurance providers to refinance members through an RTM is a “win-win-win” for everyone involved. Doing so will establish your credit union’s reputation as a supportive financial resource.
Here’s how to proceed: