The 1.3 million members of the $16.5 billion PenFedcredit union became eligible for housing finance loans in earlyJanuary which allow them to change their loan's rate without havingto undergo a full refinance application.

PenFed is able to make the loans through a system developed andmaintained by Mortgage Harmony Corp, which wrote the software to allow thefeature to be made part of PenFed's online mortgage applicationsfor at least some mortgages.

“We are very excited to add this feature to our mortgage loanarchitecture,” said James Schenck, executive vice president ofAlexandria, Va.-based PenFed, the nation's third-largest creditunion. “Our company-wide philosophy is built around doing what isbest for our membership and Mortgage Harmony's Loan RetentionSoftware, with the Rate Reset Protection feature, is consistentwith that philosophy.”

Keith Kelly, CEO of Mortgage Harmony in McLean, Va., added, “Weare thrilled to be working with PenFed and serving their memberswith a product that promotes their economic interests. Weanticipate other credit unions will follow PenFed.”

Mortgage Harmony describes its “one click” feature for resettingrates as primarily a means for credit unions and other lenders toretain their mortgage loans rather than see them refinanced wheninterest rates change.

Members using the service are able to change their loans ratewith one click on a secure website and the submission of ane-signature, all without further paperwork or additionalout-of-pocket fees.

“Mortgage Harmony's software creates a very simple process thatreaps a lot of benefits to the member and PenFed,” said VielkaAsia, vice president of mortgage operations at PenFed. “We can nowbetter allocate our back office resources to originate new loans,instead of using resources to retain our existing loans throughrefinances and modifications.”

Schenck added, “Mortgage Harmony's technology provides themechanism to put our members in control of their mortgage. Forexample, PenFed's branded 5/5 Adjustable Rate Mortgage Rate ResetProtection product is consistent with our long-standing goal toprovide products tailored for PenFed's members and theirfamilies.”

Schenck and Asia declined to number exactly how many members hadcontacted the credit union after it announced the availability ofthe loans, but Schenck termed the response “extraordinary” and“very enthusiastic.”

“I don't want to say exactly how many inquiries we have hadbecause I don't want to jinx it,” Schenck said, “but let's just sayour members really love this product and some appear to have beenwaiting for it for some time.”

Schenk emphasized that empowering PenFed's millions of membersremained the credit union's focus but that the prospect of beingable to hold onto loans without having to refinance them promisedto save the credit union enormous amounts of money and stafftime.

And Kelly, the Mortgage Harmony CEO, reported that PenFed'sagreeing to offer the loans is but one part of the company's largervision about the ways its product will both transform housingfinance and bring credit unions and banks closer together.

Mortgage Harmony is building a network, according to a companyexecutive, which the firm hopes will one day link banks sellingthese Mortgage Harmony loans to credit unions which would buythem.

“We're calling 2014 the year of harmony,” remarked Kelly. Heexplained the firm believes mortgage banks have the key connectionswith Realtors and consumers to start making large numbers ofMortgage Harmony loans and that credit unions have the liquidityand demand for loans to buy them.

This Prudential PenFed Realty office is located across thestreet from Eastern Market in Washington, D.C.

Kelly and other executives have high hopes for the networkbecause the Mortgage Harmony loans, they argue, are a much betterinvestment vehicle than conventional loans. Where conventionalfixed rate are often paid off and refinanced, often away from theiroriginators, every five to seven years, a Mortgage Harmony loanneed never be refinanced away from the issuing financialinstitution.

Kelly said the firm has buyers, at a premium, of any MortgageHarmony loans that a credit union might not want to buy but addedMortgage Harmony believes the network will be popular with small-to medium-sized credit unions who have the liquidity to be part ofthe mortgage industry but lack the staff, means or infrastructureto issue many mortgages on their own.

The network may also offer loan participations, Kelly said. Butone early problem confronts Mortgage Harmony as it seeks to buildits network. While the company now has roughly 12 credit unions,including PenFed, no banks have started to issue the loans.

“We have shown the product to community bankers,” Kellyrecounted, “And they often say, 'This is the future of the mortgageindustry.' But when we ask them if they are interested in trying itout, they saw something about wanting to see how the market reactsto it first.”

Kelly added that he didn't know what it would take to get banksto try the loans, adding that while he predicted banks would pickup the product first he's happy to have banks learn about the loansfrom credit unions.

Kelly predicted Mortgage Harmony loans, while very popular inwhat many people view as a low or falling interest rate market,will prove even more popular in a rising rate market where, forexample, a borrower with a fixed-rate loan that is set to resetafter five years might decide to reset his or her rate slightlyhigher after only three years to lock in a still relatively lowrate for another five years.

“We know that many fixed-rate loans with five-year resets nevermake it five years,” Kelly said. “They usually refinance at threeyears because borrowers get nervous about the cap beingtriggered.”