The 1.3 million members of the $16.5 billion PenFed credit union became eligible for housing finance loans in early January which allow them to change their loan’s rate without having to undergo a full refinance application.
PenFed is able to make the loans through a system developed and maintained by Mortgage Harmony Corp, which wrote the software to allow the feature to be made part of PenFed’s online mortgage applications for at least some mortgages.
“We are very excited to add this feature to our mortgage loan architecture,” said James Schenck, executive vice president of Alexandria, Va.-based PenFed, the nation’s third-largest credit union. “Our company-wide philosophy is built around doing what is best for our membership and Mortgage Harmony’s Loan Retention Software, with the Rate Reset Protection feature, is consistent with that philosophy.”
Keith Kelly, CEO of Mortgage Harmony in McLean, Va., added, “We are thrilled to be working with PenFed and serving their members with a product that promotes their economic interests. We anticipate other credit unions will follow PenFed.”
Mortgage Harmony describes its “one click” feature for resetting rates as primarily a means for credit unions and other lenders to retain their mortgage loans rather than see them refinanced when interest rates change.
Members using the service are able to change their loans rate with one click on a secure website and the submission of an e-signature, all without further paperwork or additional out-of-pocket fees.
“Mortgage Harmony’s software creates a very simple process that reaps a lot of benefits to the member and PenFed,” said Vielka Asia, vice president of mortgage operations at PenFed. “We can now better allocate our back office resources to originate new loans, instead of using resources to retain our existing loans through refinances and modifications.”
Schenck added, “Mortgage Harmony’s technology provides the mechanism to put our members in control of their mortgage. For example, PenFed’s branded 5/5 Adjustable Rate Mortgage Rate Reset Protection product is consistent with our long-standing goal to provide products tailored for PenFed’s members and their families.”
Schenck and Asia declined to number exactly how many members had contacted the credit union after it announced the availability of the loans, but Schenck termed the response “extraordinary” and “very enthusiastic.”
“I don’t want to say exactly how many inquiries we have had because I don’t want to jinx it,” Schenck said, “but let’s just say our members really love this product and some appear to have been waiting for it for some time.”
Schenk emphasized that empowering PenFed’s millions of members remained the credit union’s focus but that the prospect of being able to hold onto loans without having to refinance them promised to save the credit union enormous amounts of money and staff time.
And Kelly, the Mortgage Harmony CEO, reported that PenFed’s agreeing to offer the loans is but one part of the company’s larger vision about the ways its product will both transform housing finance and bring credit unions and banks closer together.
Mortgage Harmony is building a network, according to a company executive, which the firm hopes will one day link banks selling these Mortgage Harmony loans to credit unions which would buy them.
“We’re calling 2014 the year of harmony,” remarked Kelly. He explained the firm believes mortgage banks have the key connections with Realtors and consumers to start making large numbers of Mortgage Harmony loans and that credit unions have the liquidity and demand for loans to buy them.
This Prudential PenFed Realty office is located across the street from Eastern Market in Washington, D.C.
Kelly and other executives have high hopes for the network because the Mortgage Harmony loans, they argue, are a much better investment vehicle than conventional loans. Where conventional fixed rate are often paid off and refinanced, often away from their originators, every five to seven years, a Mortgage Harmony loan need never be refinanced away from the issuing financial institution.
Kelly said the firm has buyers, at a premium, of any Mortgage Harmony loans that a credit union might not want to buy but added Mortgage Harmony believes the network will be popular with small- to medium-sized credit unions who have the liquidity to be part of the mortgage industry but lack the staff, means or infrastructure to issue many mortgages on their own.
The network may also offer loan participations, Kelly said. But one early problem confronts Mortgage Harmony as it seeks to build its network. While the company now has roughly 12 credit unions, including PenFed, no banks have started to issue the loans.
“We have shown the product to community bankers,” Kelly recounted, “And they often say, ‘This is the future of the mortgage industry.’ But when we ask them if they are interested in trying it out, they saw something about wanting to see how the market reacts to it first.”
Kelly added that he didn’t know what it would take to get banks to try the loans, adding that while he predicted banks would pick up the product first he’s happy to have banks learn about the loans from credit unions.
Kelly predicted Mortgage Harmony loans, while very popular in what many people view as a low or falling interest rate market, will prove even more popular in a rising rate market where, for example, a borrower with a fixed-rate loan that is set to reset after five years might decide to reset his or her rate slightly higher after only three years to lock in a still relatively low rate for another five years.
“We know that many fixed-rate loans with five-year resets never make it five years,” Kelly said. “They usually refinance at three years because borrowers get nervous about the cap being triggered.”