BofA trims costly PMI; rivals may follow suit

NEW YORK — Other banks may follow Bank of America Corp.’s decision this month to cut mortgage clients’ borrowing costs drastically, including waiving the requirement for private mortgage insurance, industry observers say.
“I’ve received calls from clients telling me they are going to BofA for mortgages because of that new program,” said Phil Wasserman, chief executive at Phillip Roy Financial Services. The Clearwater, Fla.-based financial advisory firm operates a complimentary mortgage referral service.
BofA’s cost reductions were motivated in part by a desire to give bank financial advisers referrals in order to cross-sell investment and insurance offerings to new mortgage clients.
“When a customer has a mortgage with the bank, he typically buys five other products — so it’s a great way to build a relationship,” said Floyd Robinson, president of BofA’s consumer real estate business in Charlotte, N.C.
Wachovia Corp., also based in Charlotte, offers customers “a variety of pricing options that can affect their origination fee, rate and closing costs,” said spokesman Don Vecchiarello. “If customers choose to pay a slightly higher rate, fees and costs can be absorbed or reduced.” Products that do not require mortgage insurance also are available, he added.
Wells Fargo & Co. in San Francisco and JPMorgan Chase & Co. in New York have programs that reduce certain borrower fees, but not to the degree that BofA does.

Conga line possible
“If [BofA’s] program is successful, other banks will get in line,” said Jack Bartko, director of the financial services group at Standard & Poor’s in New York. Once a bank gets clients in the door with a mortgage, it becomes easier to sell them investment advice, mutual funds, and other products and services, he added.
Banks usually mandate mortgage insurance for clients who do not make a down payment of at least 20%. Premiums are paid by the client. The insurance reimburses the bank for its foreclosure expenses if the client defaults.
“Other banks are offering low down payments, but this is the first I’ve heard about waiving mortgage insurance,” said Michael White, president of a bank insurance data firm in Radnor, Pa., that bears his name.
Mortgage insurance costs about $550 a year per $100,000 borrowed, according to Glen Corso, group senior vice president of The PMI Group Inc., a Walnut Creek, Calif.-based mortgage insurer. So for a $300,000 loan, the annual premium would be approximately $1,650, adding $137.50 to the monthly mortgage payment. Premiums may be tax deductible for clients with under $100,000 in annual income.
In addition to the mortgage insurance waiver, BofA is eliminating application, appraisal, loan origination, flood determination and several other fees, which can result in the client’s saving $3,000 or more, said Liam McGee, president of BofA’s global consumer and small-business-banking unit.
A pilot program launched in the state of Washington last year saved an average of $2,800 in closing costs for about 11,000 clients.
“BofA also pays [for] lender and borrower title insurance, which can represent as much as one-third or more of total closing costs,” said Mr. Robinson.
The cost reductions apply to first-time new-home purchases, not to refinancings. Also, the bank promises to close all loans within 25 days or the first mortgage payment (excluding taxes and insurance) is waived.
The program may also encourage loan applications from people with decent credit who may have been dissuaded from applying due to the subprime-lending crisis, noted Mr. White.
“It appears to me that BofA is using mortgages like a loss leader — similar to free checking,” said Mr. Wasserman. “They want to win market share, and they know that the best customer is an existing customer.”
BofA controls about 5% of the mortgage industry’s consumer market, and the bank’s executives noted that they would like at least to double that within three years.
Competitive rates
Interest rates — while “not necessarily the lowest” available in the market — are “competitive,” Mr. Robinson said. Also, rates will not be higher, based on the loan-to-value ratio, so clients who make small down payments will not be penalized, he noted. But the bank does mandate a 5% minimum down payment. One drawback may be that BofA’s mortgage rates can be 0.25 to 0.3 percentage points higher than other banks’, according an industry observer, who asked not to be identified.
Clients would still be responsible for paying their own transfer taxes, and legal and recording fees.
The additional risk to the bank from waiving mortgage insurance is not significant — even though there are no plans to securitize the loans — given BofA’s size and scale, according to Mr. Robinson. Also, the bank’s underwriting standards are not being lowered, he added. People with credit scores that made them eligible only for subprime loans would probably not qualify, Mr. Robinson noted.
BofA’s program would make Mr. Wasserman more likely to recommend the bank to mortgage seekers, but he advises clients to obtain and compare quotes from several potential lenders.
In other BofA news, the bank announced last week that it is exploring “strategic alternatives” for its insurance brokerage business, Cranford, N.J.-based Banc of America Corporate Insurance Agency LLC. Formerly known as Fleet Insurance Services, it is the 27th-largest insurance broker in the United States, according to sister publication Business Insurance.