Homeowners who financed homes at the top of the hump on the roller-coaster ride of rate trends now can cut their mortgage rates by more than 2 percentage points.

As a result, many people who financed a home when rates were substantially higher should consider refinancing.

“If they can save a point and a half (in interest), it makes financial sense - unless they are going to sell their home in three years,” said Mike Kirch, president of Vegas Valley Mortgage.

Other experts suggest refinancing only if current market rates are 2 percentage points lower than the rate a person is now paying.

Three groups of homeowners should consider refinancing today, says Keith Gumbinger, vice president of HSH Associates of Butler, N.J., a mortgage research firm.

First are those who couldn’t refinance a few years ago when interest rates were low because they had no equity in their homes or because of recent changes in jobs.

Second are those who have adjustable-rate mortgages.

And third are those who waited too long during the last interest-rate dip.

Steve Evans, senior vice president of Bank of America Nevada, recommends homeowners take time for some simple math to evaluate the merits of refinancing.

Ask the Indianapolis Mortgage lender to give you precise numbers or estimate the cost of refinancing. A typical $100,000 mortgage costs around $2,000 to refinance, Evans said.

Calculate the difference between your current interest rate and the rate available on today’s market.

(The Federal Home Loan Mortgage Corp. reported Thursday that 30-year, fixed-rate mortgages averaged 7.02 percent nationally last week, up from 7 percent in the prior week. HSH Associates, however, surveys more lenders and figures the national average is closer to 7.3 percent plus 1.275 in points which are upfront fees charged by some lenders.)

Multiply the difference in percentage rates times the amount outstanding on your mortgage.

Figure the number of years you plan to stay in your current home.

Ask yourself: Can you recover the refinancing costs before you plan to sell? If so, then, refinancing probably will save you money, Evans says.

If your mortgage has a 9 percent rate and you can get one for 7 percent, you will save $2,000 yearly on a $100,000 mortgage, experts say. In other words, you recover the expense of refinancing in one year.

Some lenders will finance closing costs. These lenders typically charge slightly higher interest rates, but a homeowner comes out ahead if he moves and sells after a short period.

The going fixed-rate for no-cost financings is 8 percent, Gumbinger says, and, “At 8 percent, it may not make sense to refinance.”

Not everyone has a fixed-rate mortgage, of course. Many people have adjustable-rate mortgages, which raise or lower rates based on an interest-rate index, or changes in Treasury bills or certificates of deposit.

In some cases, people with adjustable-rate mortgages can now obtain fixed-rate, 15-year or 30-year mortgages for a similar or lower interest rate.

Kirch encourages many to switch from adjustable- to fixed-rate mortgages even though the homeowner may have saved money with an adjustable rate over the last couple of years.

“It’s nice what you saved, but now we’re starting to see another historic low,” Kirch says. “So maybe it’s better to stop shooting craps” on interest rates.

Adjustable rates could boost homeowners monthly payments beyond their financial ability if interest rates spike in the future, he said.

Evans views adjustable-rate mortgages more favorably, noting that most of them have ceilings and, typically, can increase only so fast in a given year.

“We particularly think the adjustable product works for people who are coming into the valley,” Evans says.

Promotional offers typically cut the rate during the initial years of the mortgage and adjust upward thereafter.

Adjustable rates work for young professionals who anticipate their salaries will rise as their careers progress, offsetting increasing monthly payments, Evans says.

“It helps them economize in the first several years of their loan with their payment,” Evans says.

If they find career opportunities in another city in a few years and sell their Las Vegas home, they may never pay the full rate on an adjustable-rate mortgage, he says.

“If you think (the house) is your ultimate, last home and you’re never going to be moving again,” then get a fixed-rate mortgage, Evans says.

Rates quoted on fixed-rate mortgages usually are higher at any given time than comparable adjustable-rate mortgages because the lender takes the interest-rate risk with fixed-rate mortgages.

Some adjustable rates now, however, bear higher interest rates than fixed rates, Gumbinger says. Long-term rates, which govern fixed-rate mortgages, have declined more in recent years than short-term rates, which are used for setting adjustable mortgages.

Fixed-rate mortgages are a much better value today, Gumbinger says.

Gumbinger says adjustable-rate mortgages still make sense for people who expect to sell their homes within two years.

For some, 15-year, fixed-rate mortgages are the best products, Evans says. These mortgages typically bear rates one-half to three-quarters of a point lower than similar 30-year mortgages.

However, a conservative borrower may decide to take a 30-year mortgage and make additional payments to reduce interest costs. If the borrower loses his job or encounters financial difficulty, he can stop making the additional payment, Evans says. The borrower with a 15-year product risks foreclosure if he misses payments.

Kirch says even those paying off mortgages early may benefit from refinancing. Often, he encourages these clients to take advantage of lower rates to change from a 30-year mortgage to a 15-year maturity.

But do you wait for lower rates or lock in the interest rates now?

Kirch suggests homeowners apply for refinancing but delay closing. Borrowers can wait as long as 90 days to close after they are approved.

“We feel extremely positive that rates will continue to drop,” Kirch said. “We have seen the economy trend to be about flat.”

With a flat economy and minimal growth, the Federal Reserve may be inclined to cut interest rates as it did Wednesday. The Fed trimmed the federal funds rate that banks charge each other for overnight loans by one-quarter point to 5.25 percent.

“We don’t expect a whole lot of movement on interest rates between now and the end of the year,” said Cary, who said he believes homeowners will be able to finance a home at approximately the same rate in December that they can get now.

Even if rates do change, Evans figures the gains may be offset by the expense of higher interest rates homeowners pay while waiting for rates to decline.

“It’s better to take the savings,” Evans says. “You won’t miss (the bottom in rates) by much.”

A few other considerations:

- Survey mortgage bankers, mortgage brokers and banks for the best rates. Be suspicious if a lender offers a rate substantially below all others. To protect yourself from bait-and-switch tactics on interest rates, ask for a written statement of the interest rates and points, Gumbinger suggests.

HSH Associates, Gumbinger’s firm, sells surveys, and the R-J also publishes weekly surveys of mortgage rates.

Don’t stop your research with the survey. Call a number of lenders to get a better feel and understanding of the market, Gumbinger says.

- Some people may be able to buy a home for about the same monthly costs they are paying for rent. A 7 percent mortgage loan for $100,000 requires $665 in principal and interest payments monthly, plus about $100 for taxes and insurance, Kirch says.

- Low- to moderate-income people can qualify for lower interest rates, lower down-payment requirements and other benefits through programs at many banks, Evans said.

Mortgage calculators will allow the user to compare the total cost of products as well as the headline rates. In addition to calculating the total interest payable, the calculator will also work out other set up costs such as mortgage indemnity premiums and arrangement fees and also take into account any, cash back that the lender is offering.

If a re-mortgage situation is being considered then the calculators will be able to compare the total cost of the existing mortgage with other, products available on the market. This means that the user can see in an instant whether or not a re-mortgage is worth pursuing and if so how much can be saved. In addition, the products with the largest potential saving are shown so the user is faced with a short list of suitable products to consider.

The reverse mortgage calculator allows consumers to see the impact of increasing their payments, shortening their amortization or changing their payment frequency all with the intent of paying down the mortgage faster.

Many consumers want to know how much house they can afford before they begin their home search. To use the mortgage calculator, consumers fill in the appropriate financial data and the spreadsheet automatically calculates roughly how much they can afford to spend on a home.

The Office of Thrift Supervision made clear recently that it retains the primary role in regulating the lending activities of federal thrifts by pre-empting a restrictive California consumer protection statute which affects advertising, the forced placement of hazard insurance, and charging of certain loan-related fees.

At the same time, four other recent OTS letters dealing with preemption of state law issues have surfaced. One deals with electronic banking in Massachusetts, a second deals with payment of finders fees in Illinois, and a third with paying interest on escrow accounts in New York. A fourth deals with mortgage reinsurance. The Office of the Comptroller of the Currency has dealt with a similar issue by allowing banks to reinsure through an operating subsidiary a portion of the risk on mortgages they originate.

While the most recent decision is important for all types of thrift lending, it is especially important to thrifts serving as mortgage lenders because California is the nation’s largest consumer mortgage market.

The agency’s letter was dated March 10 but only came to light last week. The name of the institution which requested the interpretation was redacted.

The OTS ruling dealt with the California Unfair Business Practices Statute and the California Deceptive, False, and Misleading Advertising Statute. In its request to the OTS, the thrift highlighted several examples of how the consumer protection laws were being used to impose substantive limitations on its lending activities. In its pre-emption letter, the OTS said that the Home Owners Loan Act provides the OTS broad authority to regulate all aspects of the operations of thrifts.

Of greater concern is that, according to the letter, California courts interpreting the laws have found that a cause of action under the law can be sustained on a finding of "unfairness," not by a breach of contract, or a violation of real property, commercial or tort law.

The OTS said in its letter that it has the authority to pre-empt certain laws affecting thrift lending if the law has more than an "incidental impact" on lending. Applying these provisions, the OTS determined that the practical application of the state laws as a basis for alleging "unfair competition" creates more than an incidental impact on the thrift’s lending operations, and thus that application of those laws is preempted.

According to a Washington lawyer, the OTS emphasized the extremely limited nature of its preemptive determination, referencing a 1996 determination with respect to an Indiana law not deemed to be preempted by federal law. That law principally required that advertisements be accurate.

So devoted to the ideal of customer service are bankers at Synovus Financial Corp. that some will work nights and weekends. That extra touch they believe will set them apart from competitors was highlighted when a customer called the head of private banking–a program only a year and a half old–on a Sunday night. He announced he was leaving the country for a trip in the morning and would need a passport. The banker opened up the customer’s safe deposit box and produced the needed document.

"The products we deliver are all pretty much the same, but where we’re going to beat the competition is we’re going to deliver them however and wherever the customer needs it. We have better relationships because we extend ourselves," said Walter M. "Sonny" Deriso, Jr., vice chairman of the board of Columbus, Ga.-based Synovus, and the executive in charge of the company’s "New Bank" effort.

The New Bank program means moving toward modernization of the company, which translates into delivery of products and services in ways that customers want, Deriso said.

The bank is stepping up catering not just to the wealthy–with the private banking program it’s rolling out to 10 more of its subsidiary banks from the pilot site–but to the ordinary customer’s needs. It recently completed a 14-month conversion to M&I’s data warehousing capabilities and can do more sophisticated target marketing.

The $10.5-billion-asset holding company, which maintains independent boards and charters at each of its banks, is gearing up to complete another chapter in its New Bank effort. By adding insurance bank-wide, and brokerage and financial planning services for all customers, the southeastern bank company hopes to round out its offerings and achieve what is becoming the holy grail for banks: to be the place where customers get all their financial products.

The three-phased introduction of the insurance subsidiary has begun at flagship Georgia-state chartered Columbus Bank &Trust (CB&T) and two other banks in Alabama and South Carolina. The final state in Synovus’s market, Florida, has somewhat simpler insurance regulations, and will be added after the pilot periods in the other three states.

After examining a study of other banks’ methods of offering insurance prepared by KPMG Peat Marwick, which showed most are not profitable yet, and speaking with its own bank managers, Synovus management decided not to acquire an insurance agency. It will instead offer insurance to its customers through a partnership with a third party, which has been chosen but will not be announced until June, Deriso said. The carrier will provide backroom operations, a call center and licensed agents who can work as consultants or specialist to customers with sophisticated needs, Deriso said. The bank plans to get customers to the insurance agents, who must be located in a separate area of the bank, by referrals from tellers and customer service representatives, and targeted marketing.

The first phase of the three-phase roll-out includes the simplest products for novice salespeople to understand: credit life and accident insurance which most banks have offered for years, and fixed annuities, which Synovus has offered for about a year. In addition, it will offer title insurance, through a partnership with a local firm, and worksite-related supplemental insurance for commercial customers with specialist AFLAC.

The bank is also creating a reinsurance captive for mortgage insurance. In that line of business the bank will deal with several carriers, the split depending on the amount of work done by the bank or the carrier. Because reinsurance is still a fairly new line of business for banks, Deriso said special approval would be needed from regulators. He added that he had discussed the bank’s plans with regulators in all four states as well as with the Office of the Comptroller of the Currency, and all were comfortable with the bank’s plans and indicated there should be no snags in obtaining approval.

The second phase, to begin in the fourth quarter, will offer homeowners and auto insurance. The third phase, to start late in the year 2000, will offer life, disability, long-term care and group disability insurance.

Deriso said in addition to having some employees trained to sell insurance, the plan is to have some of these specialists licensed to sell securities and be able to do financial planning for all customers. Currently, the banks can offer some customers a limited version of that service. Some of the specialists on the asset-management side of the bank can act as gatekeepers and refer some of the trust clients to the brokers. Whenever an annuity is sold, that customer has a financial profile done, a sort of minifinancial plan. But CB&T will begin piloting in May the use of what Deriso calls "superpeople," employees licensed to sell insurance and all brokerage products.

Another new program which Deriso said ties several of the bank’s financial services together, an asset management account, also requires specialist employees to sell it. In the pilot stage now and set to be rolled out in the second or third quarter, the wealthy-customer’s account has a brokerage feature and allows funds to be swept into an FDIC-insured account. The specifics of minimum account balance–probably around $10,000–and working with the data processor to clear all trades, are being worked out now.

Deriso is in the thinking stage now of the latest piece of the plan to offer customers as broad an array of financial services as possible: additional money management. He is grappling with whether to hire more money managers to complement the team that runs the company’s fixed income and equity funds, ranked by PIPER in the nation’s top ten, or to form an alliance to continue to get value from the $7 billion under management with an outside firm

Lenders were blessed and burned last week when the Financial Accounting Standards Board addressed implementation issues for its new standard to account for derivatives that affect their ability to hedge risks.

One issue followed shortly after a letter received from the Mortgage Bankers Association that expressed the trade group’s concern about a tentative decision by the Derivatives Implementation Group (DIG), an independent group that analyzes issues stemming from the new proposal and suggests solutions for FASB’s approval. That issue concerned accounting for combinations of options to hedge market risk, especially from mortgage servicing rights in the case of mortgage lenders.

The DIG decided that a combination of options can only be designated a net-purchase option, and so receive the desired hedge accounting if it meets four criteria. The MBA said in its letter that most mortgage lenders using such an instrument to hedge mortgage servicing rights would, due to the nature of the business, be unable to meet the criteria, and so would have to account for it as a net-written option. Such designations can only be accounted for as hedges under very specific and limited circumstances.

Jim Edwards, vice president of capital markets for Homeside Lending and a member of the MBA’s Hedge Accounting Task Force, said that while task force participants did not believe accounting for hedging instruments drove the mortgage lending business, the new accounting would have ramifications.

"Members acknowledged that there will be additional documentation and analytical work required to demonstrate an expectation of hedge’s effectiveness," he said. "The MBA was concerned that the conditions in DIG’s response may limit the use of certain combination option strategies being used or contemplated by some mortgage bankers," Edwards said. Edwards added, however, that such strategies are only a small part of hedging choices.

While FASB did not give mortgage lenders reprieve last week on the combination of options issue, it did ease up on the timing restriction the DIG initially required to receive hedge accounting and defer the gains or losses of a cash flow hedge of a forecasted transaction, if it appears the forecasted transaction will occur after originally specified. The DIG said that in order to receive hedge accounting, the transaction must occur within an addition period that is no more than 10% of the originally specified time period, or 60 days. The mortgage industry, according to Tim Lucas, technical director at FASB, noted that the 10% limit was excessively strict for many mortgage cash flow hedges, so the board "blew the 10% away."

Banks are not yet in the elite company of financial services firms in terms of managing customers, but the circle may be broken soon, and by community banks, no less.

A report by technology analyst Meridien Research, released last week, shows the evolution of Enterprise Customer Management (ECM) at 500 large global financial institutions in four stages, with banks lagging in the highest class of integration.

That stage is referred to as enterprise customer management, and is defined by Bill Bradway, research director at Meridien and author of the study, as when an institution is "really engaged in thinking and acting to deliver intimate, personalized and compelling levels of service that create customers for life." He added that the trick has only been pulled off so far by insurance company USAA, and a brokerage firm Charles Schwab.

Bradway said the feat is harder for banks because their businesses are more complex and they have more products to keep track of, requiring more expensive and complex technology.

He added that to reach that level requires a high level of commitment and vision from management that has been in place for a long time, and for large banks that often requires a cultural change from prior organizational philosophies. Bradway said, however, he thinks within the next couple of years a very large commercial bank may qualify for that category. But, he added, smaller banks might be more likely to get to that stage because it is easier to coordinate the activities of 100 employees than 70,000.

"Technology gets you in position to do things, but financial services is still a people business," he said.

The next highest stage, the use of behavior-based interactive marketing, was attained by only 15 out of the 300 banks surveyed. This system allows banks to view the customers against the depth and breadth of relationships–checking accounts, IRAs, mortgage–so the bank staff can use data mining to predict the next service or product the customer might need.

Although the survey is of companies worldwide, Bradway said four U.S. banks make up about 5% of the banks ahead of the game in this stage, Wachovia being one of them (see other Wachovia technology story, p. 3)

Then comes database marketing, which 60%-65% of the banks were using. In this approach, customers are segmented once a month or quarter using demographic and lifestyle data, and the relationships between them and their services are examined. However, it is a cumbersome process for the largest banks, which often have separate core processing systems for financial products ranging from credit cards to IRAs. The number of systems that must be integrated for effective database marketing can easily be 20 and as high as 50, Bradway said. Further, because the examinations are not very frequent, this kind of marketing, which is in its infancy, is not very dynamic. "A lot can happen in a quarter," he said.

The most basic stage is list pulling. For example, lists might be generated of all the CD holders with instruments maturing over the next 60 days, and letters mailed to those customers.

Now that bank customers can move their money, pay their bills and get approved for a credit card on-line, they’ll soon be able to have mortgages instantly approved over the Internet, right? Probably not.

Right now, the only bank that has the technology to originate loans other than credit cards on-line, in real time, without having to call or write the customer back, is Bank of Montreal, according to Laura Starita, a specialist in Internet banking at the GartnerGroup.

She explained that the Canadian giant has made a massive investment in time and money in a behemoth data warehousing system with a decision support tool. It can take data on a customer from several different places in the bank, analyze it and decide how much risk the bank wants to expose itself to when the customer, or potential customer, asks for the loan.

For example, a customer might ask for a $100,000 loan. If the bank has already issued a credit card and a small business loan to the customer, it might only have the appetite for $80,000 of exposure. The bank could send back the request, saying it only wants to lend $80,000, or it could approve the entire loan, she said.

In a report issued December, the GartnerGroup noted that the Bank of Montreal can approve loans for existing customers as well as new customers online. Starita said, however, that approving mortgage loans in real time is a ways off for several reasons. One inhibitor, she said, is that legally a mortgage loan needs a hard signature. Another barrier to widespread use is that most banks do not have data warehousing technology because it is expensive and difficult to set up. But the big stumbling block, Starita noted, is the loss of the personal touch.

"Culturally, they’re not ready to take on the risk of automating the process. As soon as you automate the process, you give the customer the ability to price shop, which drives them into a model of making decisions not on the basis of a relationship with you, but who is providing the best deal. (Banks) want as much as possible to facilitate the early stages of the process, perhaps the prospecting part of it, or the early stages of the approval portion. But in terms of closing or the end result, they want to make that a face-to-face communication."

She said, however, that despite all of these reasons, she expects the leaders in on-line transactional banking, such as BankAmerica, which has a data warehousing system, or Fleet Financial, First Union and Wells Fargo, to improve their automated loan approval ability greatly over the next 12 to 18 months. At that point, the mortgage loan could all be done on-line, save getting the signature.

Theodore Iacobuzio, senior analyst at the Tower Group, disagreed that mortgages will be completed in real time, on-line, except for the signature. He said that mortgages are compliance-heavy and inherently need paper–reams of it.

"CRA requirements can’t be done on-line. Insurance requirements–you have to have a house inspected–it may never be done on-line (in real time). Paper is not going to go away," he said.

Starita cautioned that although banks could soon have the ability to automate loans, it doesn’t mean people will be extinct. "BankAmerica might start the process electronically but hit a glitch because of something odd about a credit report, so then they might have to get a loan officer involved. Just because they can do it doesn’t neccessarily mean they do."