Bank of America is expanding the definition of “no-fee” mortgage loans with a product that pays lender fees and doesn’t require private mortgage insurance for those who want to put as little as 5 percent down on a home purchase.
“There is no catch, and there are no surprises” to the loan, which can save borrowers more than $3,000 in fees on a $200,000 loan, BofA officials said Monday as they launched a national campaign to promote the “No Fee Mortgage PLUS” loan.
The loan pays loan origination, appraisal, title and flood determination fees, and comes with a 25-day, “close-on-time” guarantee, eliminating surprises at the closing table, the company said.
In a conference call with reporters, BofA officials avoided the question of whether they would be recouping those expenses by charging a higher interest rate or points for the loan.
“It’s not about interest rates, it’s about value,” said Floyd Robinson, BofA’s president of consumer real estate, when asked whether the loan would carry a higher interest rate. When the loan’s elimination of fees, private mortgage insurance and other features are factored in, he said, “We’re confident the customer will feel (BofA’s no-fee loan is) the best value.”
BofA says it will cut a $250 check to anyone who’s approved for the loan and then thinks they’ve found a better deal with another lender. Robinson said that during a limited test run of the loan, fewer than 200 of 20,000 applicants cashed in on the bank’s “best-value guarantee.”
Bank of America officials say they can offer the new product at favorable rates through economies of scale, and by holding the loans in their own portfolio instead of securitizing and selling them to Wall Street investors who demand high returns.
Bank of America hopes to build relationships with borrowers, which will allow the bank to market other products to them. Only BofA customers will be eligible for the loans, which like all the bank’s mortgages will be offered only to borrowers with FICO scores of 620 and above.
“This product does not reflect a change in our underwriting standards,” said Liam McGee, president of BofA’s global consumer and small-business banking.
If there’s a catch to BofA’s No Fee Mortgage PLUS loan, it’s that the loan is so unique it may be hard for consumers to compare it to other loans.
“It’s sort of a difficult thing to get your arms around as long as they’re the only ones in the marketplace doing it,” said Jack Guttentag, a professor of finance emeritus at the Wharton School of the University of Pennsylvania who writes a syndicated column for consumers.
While other lenders offer “no-fee” loans — Washington Mutual recently unveiled a no-fee product with a built-in home equity line of credit (HELOC) — Bank of America appears to be alone in waiving private mortgage insurance on loans with greater than 80 percent loan-to-value ratios.
While other loans might offer better interest rates, those rates are rarely guaranteed and sometimes include fees that aren’t stated up front, Guttentag said. Throw in the allowances for the cost of private mortgage insurance and lender fees that are included in the BofA loan, and it’s no simple task to compare it to other, more conventional products.
“It’s becomes a tough comparison, which in some ways is advantageous to Bank of America,” said Guttentag, who said he plans to perform his own analysis of how the new loan stacks up to other choices.
“What Bank of America is doing is internalizing what is otherwise charged as fees by other lenders and third-party fees,” Guttentag said. “Obviously they have to recapture it in some way, so they’ll be recapturing it in rates and points — that goes without saying. The question is whether it will be a good deal for the borrower.”
BofA says it will charge borrowers the same rate regardless of the size of their down payment, which Guttentag said could create “adverse selection” issues for the lender. In the insurance industry, adverse selection occurs when insurers charge the same premium regardless of risk.
“If you offer the same price to insure a low risk as a high risk, you’re going to get a lot of high risk,” Guttentag said. In BofA’s case, “If they charge the same rate for a 95 percent LTV as 80 percent, they are going to be getting a lot of 95 percent loans.”
But Guttentag said he hopes BofA has enough success with the loan that other lenders will feel pressure to offer similar products.
“I thoroughly approve of it, but I hope it’s the first step in a groundswell of lenders doing the same thing,” Guttentag said. “Then we might have a marketplace that worked for the borrower.”