No-fee mortgage raises eyebrows

Home loan industry competitors are searching for hidden gimmicks, but Bank of America insists that its "No Fee Mortgage Plus" plan announced Tuesday delivers exactly what the name implies - without raising interest rates to applicants.

The new program comes with none of the traditional mortgage and settlement charges - application fee, appraisal fee, credit, underwriting, processing, title insurance, title search, private mortgage insurance, flood certification or closing fees, among others - and offers "competitive" interest rates.

On a typical loan, these fees can amount to 3 percent to 5 percent of the mortgage amount, depending upon location, and run into the thousands of dollars.

Bank of America says it is so certain that its no-fee deal stacks up well against competitors' rate-plus-fee offerings that it is actively urging applicants to comparison-shop the market intensively, with Bank of America's quote in hand, before making a commitment. If an applicant who is approved by the bank for a no-fee loan chooses to close with a competitor, the bank promises to pay that applicant $250.

The no-fee package also comes with a closing guarantee of 25 days or less. If the closing occurs later than the deadline, the bank says it will pay the applicant's first month's worth of principal and interest.

Is this all for real? How can a lender eat thousands of dollars in costs without somehow slipping them into the deal somewhere? So-called "zero-cost" refinancings are readily available in the market, but typically include the origination and settlement charges into the note rate - bumping it up by an extra one-quarter of 1 percent or more.

Other lenders also have offered "guaranteed mortgage package" quotes of rates and fees with no additional charges allowed between application and settlement. But those packages still charge borrowers most of the traditional lender and closing costs.

Floyd Robinson, president of consumer real estate for Bank of America, says the company is able to offer "a true no-fee mortgage product" in part because of its sheer size - $1.5 trillion in total assets, 55 million banking customers nationwide, and a nearly $350 billion portfolio of first- and second-home mortgages. That size allows it to create cost efficiencies and take over certain responsibilities that smaller institutions cannot.

For instance, the no-fee program allows down payments as low as 5 percent for conventional mortgages up to $417,000 - and even lower for certain "jumbo" loans up to $3 million - without private mortgage insurance premiums. The bank intends to keep all or most of the no-fee loans in its own portfolio, Robinson said in an interview.

"We are the investor, and we assume the risk," he said, of defaults or foreclosures on loans with low down payments. Rather than requiring borrowers to pay mortgage insurance premiums, the bank is self-insuring the risk and charging customers nothing for the service.

Sensitive to any suggestion that the new program loads nominally waived fees into the interest rate, Robinson said "our rates are very competitive" with other mortgage lenders who charge all the usual fees. Competing brokers or lenders might be able to quote slightly lower note rates, he said, but when shoppers look at the truth-in-lending "annual percentage rate" (APR) disclosure - where all the loan costs are factored into the effective rate being charged for the loan - "we are confident that we will have the best deal." If not, "we'll pay you, no questions asked."

Robinson added that the no-fee approach allows borrowers to choose key service providers such as title insurance and closing agents rather than settle with bank-designated firms.

Some competitors are skeptical that the new program could possibly do everything the bank claims. Steve Cecco, president of Ameristar Mortgage Group Inc. in Albuquerque, N.M., said "there's no way that anybody originates or closes a loan for nothing - it's got to be reflected in the rate or somewhere else."

Mike Bennett, western regional sales manager for Wilmington Financial, a mortgage subsidiary of insurance giant AIG, gave the program grudging respect. "I don't know too many people who can compete with it" in its current form, he said. "It's obviously a loss-leader for Bank of America." That is, the bank is cutting profit margins and internal costs to bring in customers that they can later sell other, more profitable products.

Some limitations Bank of America includes in the fine print:

You can't apply unless you have an account with the bank, even if it involves minimal deposits.

State and local transfer taxes, property taxes and other government levies are not covered by the no-fee guarantee. Nor are prepaid interest or discount points, hazard or flood insurance and homeowner association fees.

The program is solely for home purchases - primary or second properties. No refinancers allowed.

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