Mass. law may hinder mortgage refinancing

Morgan Stanley, Citigroup unit cite increased risk
By Chris Reidy, Globe Staff | November 10, 2004

Citing a Massachusetts law that just went into effect, Morgan Stanley and Citigroup Global Markets Realty Corp. could stop purchasing a category of mortgages refinanced by Massachusetts homeowners, a move that could make it harder to refinance a home loan.

The companies believe the new law makes mortgage purchases far riskier.

Morgan Stanley confirmed the stance yesterday. The Globe obtained a letter from Citigroup outlining a similar position, but the company could not be reached for comment.

If many other financial companies also decide not to purchase mortgages on the secondary market, the worst-case scenario is that such actions will "dry up half the credit available to Massachusetts homeowners," said Kevin M. Cuff, executive director of the Massachusetts Mortgage Bankers Association.

That happened in other states that enacted similar laws, he said; the laws were later redrafted to ensure consumers had adequate access to credit.

The Massachusetts Predatory Home Loans Practices Act was approved earlier this year. Among its definitions of a "high-cost loan" is a first mortgage with an annual interest rate of more than 8 percent above the US Treasury rate, which could be nearly 14 percent for a 30-year fixed-rate mortgage.

Another provision seeks to stop unscrupulous lenders from persuading homeowners to refinance their mortgages several times in a brief period. By piling on fees, lenders can use serial refinancing as a way to strip equity from a consumer's home.

To deter this practice, the law lays out guidelines for refinancing mortgages that are five years old or less. Under the law, it must be shown that refinancing is in the "borrower's interest." A lower monthly payment or switching from an adjustable-rate to a fixed-rate mortgage are among ways a loan might be determined to be in a borrower's interest.

But the borrower's interest provision worries many companies that purchase mortgages on the secondary markets. Potentially, it exposes them to liabilities they didn't have before if a refinanced mortgage is later determined not to be in a borrower's interest.

These financial institutions buy mortgages on the secondary market from mortgage lenders, which then use the money to offer more mortgages to consumers. If financial institutions stop purchasing mortgages from lenders, fewer consumers ultimately will be able to refinance.

"Less available credit is the issue here," said James Dougherty, executive director of the Massachusetts Mortgage Association. "The final word isn't in yet. We won't know what the impact of the new law will be for a little while."

At the Massachusetts Division of Banks, senior deputy commissioner David Cotney said, "We are aware of no mortgage lender who has stopped making mortgages available to Massachusetts consumers."

If Morgan Stanley is the only player on the secondary market to stop buying Massachusetts mortgages, it will have limited impact, said Cotney, who added that he is unaware of any plans by the largest purchasers of secondary mortgages, Fannie Mae and Freddie Mac, to take similar actions. The division plans to hold hearings shortly to listen to industry concerns.