Recast Point Reviews

With the inverted yield curve and the fact that over 2 trillion adjustable rate mortgages are coming due in the next 12 to 18 months, I’ve been getting a lot of email lately from MC users sharing ideas and looking for advice on the best ways to help their customers with Option ARMs be better prepared for their recasting points. The way to do that is with a “Recasting Point Review”.

For clients who have Option ARMs, a Recasting Point Review should be conducted once a year alongside a Freedom Point Review and as part of the Annual Equity Review. (For those who aren’t yet familiar with the term, a Freedom Point Review determines whether a homeowner is on track with their goals for when they plan to reach their freedom point — the point at which a homeowner’s assets exceed their debts and when paying off their mortgage becomes a strategic decision they do because they want to, not because they have to. For more on the freedom point and freedom account, see my blog post: http://davesavage.typepad.com/my_weblog/2006/10/helping_homeown.html).

I call annual reviews such as these LoanNOW Opportunities because they can generate new business quickly for Mortgage Planners — many within the next 30 days.

During a Recasting Point Review, a Mortgage Planner will forecast and illustrate the estimated date that the monthly payment will recast based on the current interest rates over the next 12-18 months. It is critical that homeowners with Option ARMs are proactively managing their mortgage so they can avoid surprises and payment shock. To steer clear from recasting, most homeowners either increase their monthly payment or refinance into a new loan.

In fact, a lack of understanding of recast points was the underlying point behind the recent Business Week article, “How Toxic Is Your Mortgage?” (see my blog post: http://davesavage.typepad.com/my_weblog/2006/09/the_business_we.html for a link to this article and strategies for overcoming the article’s challenges).

Loan officers have an obligation to educate their clients to ensure that they understand their mortgage options. There are many different reasons why people choose an Option ARM—for instance, they could be investing in a property for cash flow and exposure reasons and may be selling it before the loan reaches its recasting point; or they could be homebuyers who are anticipating a lump sum bonus or a raise but want to buy their dream house now.

For the average homeowner who chooses an Option ARM, however, we feel that the best way to ensure preparedness for a recast date is to save the difference between their mortgage payment and what the cost of a higher loan (such as a 30-year fixed) would have been, to achieve their freedom point faster. If the homeowner isn’t saving this money in a safe and secure financial account, then they are spending their future and removing their ability to achieve their freedom point and to handle the recast payment.

Here’s an example of how mortgage originators should be illustrating the recasting point of an Option ARM at the point of sale with borrowers. This comes from the amortization schedule of a Total Cost Analysis report:

Here’s an example of how Mortgage Coach can illustrate the risks and rewards of an Option ARM. This comes from the top front section of a Total Cost Analysis report:

Recast Point Reviews have the potential to drive new business and to build long-lasting relationships. Mortgage Planners who conduct a Recasting Point Review as part of the Annual Equity Review for all appropriate clients will be doing the “right thing” ethically and will have a competitive advantage over loan officers who don’t clearly illustrate the recasting point.

I have been hearing from many top Mortgage Planners that they are helping lots of homeowners avoid the payment shock of having their monthly payment recast by providing this proactive service. I strongly recommend that you reach out to all your referral sources—including Realtors, financial planners and CPAs—to offer this new service to their clients. I also recommend that every time you conduct this service for a client that you ask them if they know anyone else who might benefit from a “Recasting Point Review”. This is one of the best strategies to help homeowners and to generate some new business over the next 30 days. Good luck!

To see how a Recast Point Review works first-hand, view an online video: ftp://downloads.mortgagecoach.com/Training/Strategy_Alert_Negam.wmv

For more information on understanding how to strategize around Option ARM loans and how to conduct a Recast Point Review read: Demystifying the Negative Amortization Adjustable Rate Mortgage.