Beware The Biweekly Mortgage

A few weeks ago in this space I recommended that people investing for retirement should avoid the overpriced stock and bond markets and any imminent market correction and instead invest in themselves, namely by paying down their mortgage. It's a 100% guaranteed risk-free investment, and the amount of money you'll save will dwarf the return you might get on bank CDs. And it will make your household budget in retirement a lot easier to balance.

But one way NOT to pay off your mortgage is by calling one of those outfits that promise to help you pay off your loan early, for a fat fee, of course. They often advertise a "biweekly" mortgage in which you agree to send them one-half of your monthly mortgage payment every two weeks. By doing that, you're essentially making one extra mortgage payment a year, thus paying down your loan faster.

What the consumer is paying for, I guess, is the discipline to make those extra payments that they might not make on their own.

While perfectly legal, this is one of the worst consumer ripoffs, since you can easily do the same thing yourself for free. Now the Consumer Financial Protection Bureau has taken this product head-on by filing a lawsuit against one of the companies that offer the "service."

On May 11, the CFPB filed a lawsuit in federal district court against Ohio-based Nationwide Biweekly Administration Inc. The agency alleges that "Nationwide misrepresents the interest savings consumers will achieve through a biweekly mortgage payment program and misleads consumers about the cost of the program."

According to the CFPB press release announcing the suit, Nationwide charges a setup fee of up to $995 for its "Interest Minimizer" program, plus another $84 to $101 a year in payment processing fees. The CFPB alleges that "consumers will pay more in fees than they save in interest for the first several years in the program, and that many consumers will leave the program without saving any money at all." The agency says Nationwide collected nearly $50 million in setup fees between 2011 and 2014.

I have no idea if the CFPB's allegations are accurate or that the company did anything illegal. (The CFPB claims the company's marketing practices violate the Telemarketing Sales Rule and the Consumer Financial Protection Act's prohibition against unfair, deceptive or abusive acts or practices).

I do know that biweekly mortgages – which have been around for decades but have waned in popularity, thank goodness – are a huge consumer ripoff. Indeed, they used to be a lot more popular years ago when interest rates were higher, so there was more of a benefit to making extra payments. Plus more consumers have gotten the message to avoid the product. Notably, mortgage lenders themselves don't offer the product, and none that I know of has a marketing arrangement any longer with a company offering one.

This isn't to say that paying off your mortgage in this fashion isn't a good strategy. It makes a lot of sense. Perhaps that's why some consumers have fallen for the bait. It sounds like a good deal.

For one thing, it's relatively painless. To most people, I'll bet, paying one-half of your mortgage every two weeks isn't a whole lot different from making one monthly payment. Most people won't even feel it. But at the end of the year you've made one extra payment, which goes right to your principal.

The problem is that these companies charge you a huge upfront fee, then charge you additional fees for handling the payments. As the CFPB complaint shows, that would wipe out any savings you may achieve. The fact is, you could do this easily yourself and save that extra money, which you could of course put towards paying off your mortgage early.

So when you see an offer for a biweekly mortgage program, by all means learn about it and follow the instructions. Just don't send that company any money – send it to your mortgage lender instead.

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Speaking of the CFPB, I think a lot of the work it does is for the public good. Creation of the agency was long overdue. Lenders complain about it all the time, but if they had been treating their customers fairly all these years, there would have been no reason for its creation. Just like all purveyors of products and services that consumers buy, lenders have to be held accountable.

Unfortunately, since it is an agency of the federal government, we can expect the CFPB to do something head-scratching from time to time.

Take for example its announcement on May 14 that it is launching a "public inquiry" into student loan servicing practices "that can make paying back loans a stressful or harmful process for borrowers."

The CFPB draws a strong distinction between student loan servicers and lenders, which – surprise, surprise – it isn't looking into. And guess why? Because the vast majority of student loans are made by – guess who? – the federal government. Private companies and a couple of banks service the loans.

The CFPB notes that it oversees student loan servicers – but not lenders. (Note that it does regulate credit card, mortgage and auto loan lenders, but not student loan lenders). That, I suppose, lets it off the hook of looking into how the federal government has saddled millions of families with tens of thousands of dollars of student loans while driving up the cost of higher education into the stratosphere, while creating the next big taxpayer bailout. Instead, it's looking into servicers for "industry practices that create repayment challenges" and "hurdles for distressed borrowers."

That's like blaming the waiter because the cook burned your meatloaf.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.