CEMA: Healthy ReFis for Good Borrowers
Even before the Discount Rate was hiked, I had been exploring ways to take advantage of the current ultra low rates. Mortgages are under five and half percent, and are likely to rise once the Fed QE and MBS purchase programs end. We should be expecting modestly higher rates sooner rather than later, perhaps by the second half of the year.
There are lots of modification programs for those people who bought more house than they could afford and are now delinquent on their mortgages. What about those of us who made prudent purchases and actually are paying our mortgages on time?
Despite generally tight credit conditions, there are some ways you as a homeowner can use the current rate environment to your advantage. For homeowners who are current and have a good payment history, there are specific cost-effective ways to lower your monthly mortgage payments. Whether it makes economic sense to do so depends upon how long you plan on staying in that house — and the state you live in.
A comparison of closing costs by state can be found online (here and here). I live in New York State, which has the most expensive closing costs in the country, closely followed by Texas, Florida, Oklahoma, New Mexico, New Jersey, Pennsylvania, Alaska, Colorado and California.
Consider a hypothetical NY ReFi with a prime, non-jumbo mortgage. The biggest costs are going to fall into 3 categories:
1) Mortgage Recording Tax (varies by county) (0.8-1.925%)
2) Title Insurance
3) Property Tax & Escrows
Let’s assume a $417k conforming mortgage. Shop around for rates, and you can find major banks offering ~5.25%.
The factor that determines if a Refi makes sense are typically the Recording Tax (~$3350 -$4900) and the Title insurance ($3000-$5000). If a homeowner can save $300-$500 per payment by doing a ReFi, they can eventually recoup the costs after about 2 years (based upon the numbers above).
However, New York State has recognized what a burden these taxes are to those who want to a basic ReFi. The State has created what are known as CEMAs — Consolidation, Extension and Modification Agreements.
CEMAs are a form of mortgage refinance that you can only do with your existing lender. They have one very specific advantage: They do not require a new mortgage recording tax — that is the biggest chunk of taxes paid at closing. Further, CEMAs do not require a full title search and reinsurance — rather, just a search since the property was originally purchased by the refinancer. This represents another substantial savings at closing.
The last factors are the Property Tax & Escrows. These can amount to a substantial sums of money, but they are not fees. They are taxes that would have to be paid regardless of whether you do a ReFi or not — so they do not count towards total closing costs when determining if a ReFi is economically worth it.
Given that I live in the highest closing cost state in the nation, the CEMA rules work for a ReFi for me. Without the massive closing costs, the math of a ReFi via CEMA changes dramatically. I come out ahead after just 6 months. To determine if a form of CEMA ReFi with your own bank is worthwhile, you will need to know what the taxes and rules are. You can verify the closing costs with an real estate attorney.
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See also:
New York State Taxes
Judicial Title Insurance Agency
http://judicialtitle.com/recbook.php
State-by-state closing costs
By Bankrate.com
http://realestate.msn.com/article.aspx?cp-documentid=13107766
State-by-state costs
http://www.bankrate.com/brm/news/mortgages/2008/closing_costs_map_a1.asp
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February 22nd, 2010 at 10:42 am
Why wouldnt you take a 5/1 ARM at 3.75%?
Despite the idiotic punditry against ARMs… they turn out to be great products. ARMs that are currently “adjustable” are mainly in the 2.5 to 3.25% range. Not a bad rate in the recession.
~~~
BR: Risk free low rate lock in — makes Mrs. BP happy
February 22nd, 2010 at 11:16 am
>>Why wouldnt you take a 5/1 ARM at 3.75%?
i remember about 12 years ago i asked a friend who was pretty financially savvy on what mortgage he had on his house. he told me a 5 year ARM. i said what are you crazy the rates are going to go up and you’ll be caught holding the bag. well rates are still in the toilet and i’ve heard over the years over and over again how they would be going up. i won’t believe it until i see it. i wasted thousands of dollars being in a 30 year fixed. oh well.
February 22nd, 2010 at 11:42 am
If you are risk-averse; if you don’t hold a happily sanguine view of human nature and the foundational strength of the economy; if you believe in your own ability to survive whatever the economy throws at you, then, my recommendation is a thirty-year fixed, but only if you get a drop of at least a point (100 basis points) from your existing loan. Otherwise, even if the closing costs make sense, it still might take an inordinate amount of time until you receive benefits, and if you happen to move, then they are all lost.
But being married, w/out children (or at least that’s my assumption), I’d say in a big way it doesn’t much matter. Go risky. Get an ARM. Do whatever you like. What’s the worst can happen? Interest rates zoom up and you take a haircut. You’ll still be able to survive, and you won’t be risking the future of any innocents (spouses don’t count).
February 22nd, 2010 at 11:45 am
“CEMAs are a form of mortgage refinance that you can only do with your existing lender.”
And if I’m currently paying my mortgage on time, the evil, greedy, TARP-recipient Vampire Squid-like banker who holds my mortgage will just offer me a lower rate out of the goodness of his heart…
~~~
BR: You threaten to go to a competitor — if the rate difference is enough, its worth doing the refi at 5.125%
The advantage of staying with your existing lender is you save on the taxes
February 22nd, 2010 at 11:46 am
The point of a lock in at historically low rates is that you are guaranteeing these levels for the next 30 years.
Rates only dropped to these levels 2 years ago — for those fo yuo who want to make the ARM bet,t he time to do it is when rates are high, not at 50 year lows.
February 22nd, 2010 at 11:58 am
“And if I’m currently paying my mortgage on time, the evil, greedy, TARP-recipient Vampire Squid-like banker who holds my mortgage will just offer me a lower rate out of the goodness of his heart…”
I did worse. I paid off my mortgage about five years ago. It’s no good being an ant in a land full of grasshoppers. I’ve a good mind to go lever up again and turn my cash into something real that’s out of the reach of this utterly fraudulent and illusory real estate market. When prices crash again, as they will, I’ll just walk away.
February 22nd, 2010 at 12:01 pm
But… it looks like you’re giving up 1.5%/yr to “lock-in”. (This is close to 25% of your payment!)
Then even IF… one paid 6.75%/yr for the NEXT 5 years after the ARM-reset on the floating rate (roughly a double from current level, and kinda the highest level in 10-yrs).
Even IF that happened… you’re slightly better off in the 5/1 ARM after 10-yrs (time value of money).
Of course… if you sell the house within 5-yrs or in year 6, 7, 8… even under the scenario above… your WAY better off in the ARM.
February 22nd, 2010 at 12:02 pm
you have to pay title insurance again on the refi? talk about the biggest scams in finance…. title insurance is a total joke in the first place – but the fact that you have to pay it again when you refi is impossibly absurd.
when I bought my house, you pay for a title search, and then title insurance. I politely asked the agent “if i’m already paying you for the title search, why do i need to pay you insurance?” “in case there is a problem with the title,” she replied, obviously. “well then why am i paying you to do the search if there could be a problem with the search you do?” i asked, rhetorically. I then explained to her, “listen, i’m going to pay for title insurance anyway, but i just want you to tell me it’s a load of crap.” she couldn’t bring herself to admit as much. I asked her if she could get me data on how many title insurance policies they had written, and how many they had ever had claims against. she said she would but never got back to me…
~~~
BR: No, You do not pay title insurance again — but you do have to pay for a search to make sure the title has not been encumbered since the prior (original) closing
February 22nd, 2010 at 12:16 pm
kd:
I’m a retired closing attorney. Title insurance is a fraud. Just like most of the rest of the residential real estate business.
Here’s the deal regarding title insurance: Searches of the public records cost next to nothing ($50-$100, depending on the county, in my state). Title insurance is charged as a percent of the purchase price (usually $2-$4/thousand of title insurance). Obviously, as house prices went up, title insurance companies made more money, but without really assuming much more in the way of risks.
But that’s small beerso far as fraud goes. What also happens is that vastly more searches are done than actually close. Although these are supposed to be charged to whomever ordered them, title companies do the ones that don’t close for free, making it up on the ones that do. And the insurance is so lucrative, that’s not the only bribe they offer to their customers (real estate agents, mortgage companies, etc.) They routinely, like pharmaceutical sales reps at doctor’s offices, take the managers and agents on golf outings; buy lunches for the office, etc. The cost of all that is ultimately born by the consumer. It’s illegal, according to RESPA, but what can you do?
February 22nd, 2010 at 12:17 pm
KidDynamite:
It’s worse than you know.
If you carefully read a title policy, you’ll see they exclude liability for pretty much everything that can go wrong with a title search. Kinda like an extended warranty on a used car – they generally don’t cover most of the stuff that breaks…
February 22nd, 2010 at 12:17 pm
Curmudgeon beat me by 1 minute…
February 22nd, 2010 at 12:18 pm
Curmudgeon: “I did worse. I paid off my mortgage about five years ago.”
I did the same thing a couple of years ago and don’t regret it for a minute. I’ll gladly trade the opportunity cost for the peace of mind.
February 22nd, 2010 at 12:20 pm
i was having a discussion with a friend of mine who said that society pressures people to buy stuff, and he was placing blame on “society” for foisting unnecessary crap on people.
i argued that this was bs, and that i had almost NEVER purchased something that i didn’t want, or didn’t feel i was getting value for: EXCEPT for title insurance for my house. at least i knew it was bs up front though.
February 22nd, 2010 at 12:23 pm
But kd:
Title insurance is required by all conforming loans. Guess what these loans “conform” to? Fannie and Freddie and Ginnie Mae guidelines. The government made you buy the insurance.
February 22nd, 2010 at 12:24 pm
but anyway… so this is true? you have to pay title insurance again when you re-fi? i simply don’t get it – can anyone make the case for the logic behind this?
February 22nd, 2010 at 12:26 pm
curmudgeon – let me ask another question – let’s say i own my home outright, and I have title insurance. if i take out a mortgage on my home now, do i have to pay title insurance again? WHY? (other than that the guidelines require it – because i already HAVE it!)
February 22nd, 2010 at 12:35 pm
OT for BR: “Towards an integrated ceramic micro-membrane network: Electroless-plated
palladium membranes in cordierite supports”
Look it up. Interesting.
February 22nd, 2010 at 1:06 pm
kd:
Why title insurance again on a refi? It’s a good question. The stock answer is to ensure that no new liens have been placed on the property since the last title examination. But here’s the deal–the examination need only go back to your existing mortgage. In fact, for equity lines, a fair number of banks would do a quick and simple search on their own, and not charge the customer.
But that’s not good enough for “conforming” first mortgages that are purchased by the GSE’s because they see the refi as a brand new loan, as it will be sold to brand new investors. (Some would call what they do in that regard “churning”).
February 22nd, 2010 at 2:02 pm
“CEMAs are a form of mortgage refinance that you can only do with your existing lender”… you can do them with any lender willing to accept the assignment but the trouble is the extra expenses for legal and the time required to dig out the original notes from the assigning banks vault.
February 22nd, 2010 at 2:39 pm
You don’t have to buy title insurance for a refi, you just have to have your title insurance “re-issued” (Orwell would be proud) by your original title company for a fee that is not as much as new title insurance, but is still significant.
February 22nd, 2010 at 2:49 pm
I’ve been thinking about a refi on an investment property and thanks to this blog post I followed up with my lender (BOA). A refi on the open market would have cost ~$3800 including new appraisal, surveys (!) etc. I bought a property last year and could not believe how far up the tailpipe the lenders are willing to crawl. The administrative overhead on a vanilla mortgage was unbelievable.
BOA didn’t know anything about CEMA but offered the Making Home Affordable Plan instead. I can convert a 30 yr fixed conforming loan to a 15 year fixed conforming loan with an APR is 5.098%, which is great for an investment property. I have not executed but by the looks of it there appears to be a great deal less paperwork. The fees are ~$2600. They told me 3 times that they will _not verify_ employment, which seems suspicious. They said it can take up to 60 days to process the paperwork.
Anyone else done this program?
February 22nd, 2010 at 4:38 pm
For this to work out, you have to be lucky enough for your bank to not have sold your loan to Fannie or Freddie or this is impossible since the loan is broken up into many pieces and a simple modification like this won’t work.
February 22nd, 2010 at 11:21 pm
Every CEMA I’ve ever done still had the lender requirement that a new title policy (lender’s policy) be issued but at the refinance rate in NY: note to readers, the lenders on these deals were all larger institutions or brokers selling the loans to larger institutions. Barry, did you work with a local, community type bank? Seems to me that a local would be the only one to exempt the reissued lender’s title policy following a quick search update.
If you are in New York and consider refinancing, Barry’s mention of utilizing a CEMA saves a ton of money for you. Like has been said in this thread, it must be the same lender, absent an assignment which is time consuming and the current mortgage can charge whatever they would like to execute the assignment. One other note is that there is no statutory requirement that an existing lender is required to provide an assignment.
February 23rd, 2010 at 7:20 am
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