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Monday, August 23, 2010 11:08 AM

Benevolence by JPMorgan? "JPMorgan Offers us a Chance to Refinance at 4% with No Closing Costs" What's Going On?

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Reader "Michele" received a notice from JPMorgan Chase out of the blue, offering to lower her 4.75% mortgage to 4.00%. Chase will waive closing costs.

Michele Writes ...

Hi Mish,
My husband and I just got an offer we can't refuse. We have our home mortgage with Chase bank. This past year, we have been aggressively paying off our 15 year fixed at 4.75% with extra monthly payments on principle. This week, we got an offer from Chase, to refinance for free to a 15 year fixed at 4%, with no prepayment penalties.

The first paragraph of the letter goes like this: "It seems like responsible homeowners like you - who always pay their mortgage on time - are the only ones who haven't received mortgage "relief." At Chase, we think you deserve relief as much as anyone else, and we believe we can lower your mortgage rate now through the Chase Rate Reduction Program."

Any theories on why a bank like Chase would give up .75% interest and pay the origination fee, appraisal fee, title insurance, attorney fees, closing fee, notary fee, flood determination fee, overnight delivery fee, title search fee, recording fee and city/county tax/Stamps fee?

Benevolence by JPMorgan?

Hello Michele

In spite of the wording of that letter rest assured that JPMorgan Chase has its best interest at heart not yours. However, it just so happens it is quite possible its best interest and yours are aligned.

What's Happenin'?

  • Mortgage rates have collapsed for very qualified borrowers.
  • Refinances are booming, again for qualified borrowers.
  • You have equity in your house.
  • You are a good customer.
  • JPMorgan is afraid they will lose a profitable loan.
  • So they offered to reduce your rate.

While it may be a good deal for you, the offer has nothing to do with their McDonald's like statement implying "you deserve a break today".

The driving force is what is in the best interest of JPMorgan.

Low Mortgage Rates Spur Refinance Boom

FreeRateUpdate reports Mortgage Rates Spurring Refinance, but Some Banks are Underwriting Too Slow
With the current mortgage rates at 4.00% for a 30 year fixed, 3.50% for a 15 year fixed and 3.25% for a 5/1 ARM, home owners are now taking the plunge to refinance. Many have been just watching the market to see what was going to happen and are now making their move. Since rates have reached historical lows not seen since the 1950s, the refinance door has opened up for everyone. Even those who already enjoy low rate mortgages are eager to apply for a refinance. Mortgage rates may be spurring refinance, but some banks are underwriting too slow to get loans closed.

Consumers, no doubt, are becoming frustrated with the amount of time it is taking to close their refinancing deal. As mortgage guidelines have changed and have become more complicated than several years ago, the process has become longer. In the past, automatic underwriting systems told exactly what was necessary to approve a loan. As the rules have changed, processors and underwriters must thoroughly examine the financial history of an applicant. Every credit glitch, every dollar deposited, every bad check and every overdraft must be explained. Documentation that must be received and verified can take a very long time. Any issue found delays the refinance mortgage from closing within a reasonable amount of time. ....
It's highly likely JPMorgan Chase knows Michele has no "glitches" and that it is a matter of time before she refinances. To keep the loan, JPMorhan sends a "Benevolent Letter".

How Credit Scores Affect Refinancing

Jim Gallagher at the St. Louis Post Dispatch writes Refinancing mortgage now may be timely idea
Mortgage rates hit yet another new low this week — 4.42 percent on a 30-year loan. That's the lowest since Freddie Mac began keeping track in 1971.

So, if you've been thinking about refinancing, is now the time to strike?

The answer is yes, probably. Rates may go lower in the next few weeks; no one knows. When they hit bottom, we won't realize it.

But the consensus among economists is that our slow-poke economy will eventually pick up steam and interest rates will then go higher.
I do not know where mortgage rates are going, but the consensus the economy is going to pick up steam is foolish.

The odds are we will not see a double-dip recession for the simple reason we are still in one. Nearly every economic indicator is headed lower.

Moreover Small Businesses are Not Hiring - Why Should They?

Gallagher continues ...
If you're eligible to refinance, consider yourself lucky. "You can be the perfect borrower, but you won't qualify to refinance because the neighbor next door went into foreclosure and the house sold for 50 cents on the dollar," says Doug Schukar, CEO of USA Mortgage, one of the largest mortgage banking operations in St. Louis.

Mortgage lenders have tightened their standards since they helped KO the economy in 2008. The mortgage rates you see advertised are for the most credit worthy customers.

If your credit score is under 720, you probably won't get the best rates, says John Frank, president of Paramount Mortgage in Creve Coeur. If it's under 640, you'll find it hard to get a mortgage. The median credit score in the U.S. is 711, according to the scoring company FICO.

"You can negotiate," says Suzanne Gellman, consumer economics specialist at the University of Missouri. Lenders add "junk fees" to boost profits, so look closely at the charges. "Missouri doesn't require lawyers. So, if it says 'legal fees,' where was the attorney?" she asks.
The one thing I would caution Michele on is the waiver of closing costs. Does it really mean all costs? With no points?

Others may disagree, but I like "no points, no fee loans" for the simple reason if rates drop again, you can refinance again without penalty.


"JH" Writes ...
I’d be interested in knowing if JP Chase’s offer is to re-fi the entire ORIGINAL loan balance, or just the remaining. If Michele is paying down principal, JPM is seeing less and less actual interest each month on the loan (especially true on a 15yr am), so I’d not be surprised for a loan offered to “start over” the amortization schedule on a new loan for the ORIG amount, thereby maximizing JPM’s interest income.

I am pretty certain that JPMorgan Chase would not be doing what you suggest. It would add risk to JPMorgan while giving cash back to Michele. Even if that were the case, Michele could simply take the cash back, and apply it to the new loan, which I believe she would do.

Nonetheless, there is a trap of sorts given Michele may only have 10 years left (or 8 or whatever because of the extra payments), and now she is back in a 15-year loan.

However, Michele seems disciplined enough to make extra payments. She can easily keep making her current payment (with extras). Assuming Michele has a year's worth of living expenses in an emergency fund in cash, I would suggest she continue to do just that.

In that sense, nothing has changed but the lower rate. However, in an emergency she also has the flexibility to make the lower payments. This is an advantage to someone with discipline like Michele. For someone without discipline, it can resort in more interest being paid than their original plan.

Addendum II:

Michele writes ....
I called the Chase representative handling our case, and he assured me that, "even though it seems unbelievable, Chase is covering all closing costs. There will be absolutely no closing costs for us. And, no points." I will get back to you if any hidden costs pop up when we get our first statement on the new refinance loan.

Yes, you are correct in writing that we have no glitches. Our credit scores are high 700, low 800, we have 62% equity in our house, healthy savings accounts, both employed and no other debts. Driving to work in my nine year old car, and coming home to second hand furniture, I always wondered how my peers could afford so much new stuff over the past ten years. Of course, your blog has been telling us their housing ATM secrets for years now. At least in this deflationary economy, we finally feel less "suckered" then we did in the go-go housing days.

Thanks for a great blog.
Mike "Mish" Shedlock
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