Fed Comments Push Rates Up; Re-Casting Problems!

Hawks Eat Doves

Interest rates shot up again yesterday, as the Fed indicated that it may increase the Fed Funds rate faster (as much as 1% this year) than previously anticipated.

The Fed also implied that it would stop buying mortgages and bonds (via “Quantitative Easing”) which would put further upward pressure on rates.

This surprisingly “hawkish” language by the Fed sent both the bond and stocks into a tizzy, and rates increased throughout the day yesterday.

As a reminder, a “hawk” within the Fed is someone who believes in tighter monetary policy to ensure inflation and/or asset bubbles remain in check.

A “dove” within the Fed is someone who believes in looser monetary policy (very low rates; more quantitative easing) as a requirement to help stimulate the economy (with more borrowing and spending).

As a final point, I want to remind everyone that rates still remain lower than where they have been for most of the last 10 years, and as of the date of this blog, we are still quoting some jumbo rates in the high 2% range (something we never say prior to 2020).

I typed “hawks eat doves” above because the Fed has been extremely “dovish” since COVID, so the “hawkishness” of the Fed yesterday caught many market-watchers by surprise.

Re-casting = Re-amortization After A Lump Sum Paydown Of Principal

Most lenders allow borrowers to re-cast or re-amortize their mortgages when they pay down the principal balance.

For example, Bob might have a $600,000 mortgage at 3.5% with payments of $2,694 per month, with 27 years remaining.

If Bob’s grandma dies, or Bob wins the lottery, or Bob’s company IPOs, or Bob wins a lawsuit, or Bob robs a bank, Bob might then have an extra $200,000 he wants to use to pay his mortgage down.

If Bob just pays his mortgage down to $400,000 and says nothing to his servicer, his payment will remain $2,694 per month (and Bob will think WTF? Why did I pay down my mortgage?).

BUT – if Bob has his mortgage re-casted, his payment will drop to $1,910 per month – $400,000 at 3.5% over 27 years – and Bob will be very happy.

If borrowers want to re-cast they need to contact their servicer to inquire about the procedure and be prepared to pay a fee, usually in the $300 to $400 range.

Re-casting Problems

  1. Some Servicers Don’t Allow It. Some servicers don’t accommodate re-casting and many mortgage banks who sell their servicing rights cannot guarantee which servicer a borrower will end up with. Hence, we cannot always guarantee that borrowers can re-cast.
  2. Some Investors Don’t Allow It. Some investors (that buy loans from mortgage banks) don’t allow for re-casting, particularly jumbo investors who service their own loans.
  3. Re-casting Too Soon Can Result In Early Pay Off Penalties. If a borrower pays down her loan more than a certain percentage, e.g. 20%, within six months of funding, the mortgage bank that funded that loan can face significant “early pay off” penalties. This is often an issue for us when a buyer wants to buy a new home before selling her old home – with the intention of selling the old home, after buying the new home, and using the net proceeds to pay down the new loan within six months.

My point is that we can sometimes not guarantee that borrowers will have the ability to re-cast.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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