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Banks Won’t Let Everyone Refinance Mortgages

This article was written by in Real Estate and Home. 5 comments.

Mortgage interest rates are still low, a great relief to first-time home buyers, real estate investors, and households considering refinancing their higher-rate loans initiated over the past few years. Banks aren’t too eager to hand those low-rate mortgages out to everyone who wants them, however. If you read financial media, you’ve probably heard that this is a great time to refinance your mortgage. After all, you could save thousands of dollars by turning a loan with a 6 percent rate into one with a 3.5 percent rate.

The government has put into place programs to help households that are struggling with their mortgages due to the real estate market crash and the resulting home values. Those deeply underwater or behind on their payments can take advantage — or can try to take advantage — of the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP), though even borrowers who qualify have had difficulty working with their lenders. It seems like banks aren’t interested in reducing their profits from mortgages.

For a long time, financial experts have recommended fixed rate mortgages over adjustable rate mortgages. The predictability is important. With an ARM, borrowers are exposed to a significant amount of risk. If mortgage rates go up, higher interest payments down the road can destroy a family’s cash flow. When interest rates were higher, there was risk that an adjustable rate mortgage, offering a rate slightly lower than fixed rate mortgages, would shoot up in the future.

The credit crunch shrank interest rates significantly to the dismay of millions of borrowers who followed the advice of professionals or saw the risk without external influence. Now, many borrowers are stuck with long-term interest rates of 6 percent or higher. Those who don’t qualify for assistance through the government programs — those who have diligently met their financial obligations and who might not be underwater enough to get into a debate with their lender — are finding it difficult to obtain refinancing.

A recent feature on CNN Money illustrates this difficulty, which is likely more representative of the financial industry than the impression the industry provides for itself, that anyone can refinance a loan to access low rates.

No one can predict the future. When interest rates are at 6 percent and the real estate market seems to be booming, the average interest rates in five years may be 12 percent and it may be 3 percent. Those who locked in a rate of 6 percent expecting it to be low received the benefit of a predictable loan. There should be no surprise that many borrowers with good credit are finding resistance from banks to refinancing today. The banks don’t necessarily still own the mortgages, but they’re counting on the revenue they expected to earn from borrowers when the banks offered the fixed rate mortgages to the borrowers. Banks aren’t going to willingly or easily sign off on a reduction to their revenue.

Here is how one borrower described her family’s situation:

The Candelas have tried several times to reduce the almost 6% rate they’re paying on their mortgage.

Twice they attempted to refinance, in 2009 and 2010, but their home’s value had fallen by so much — from $650,000 to $423,000 — that the bank denied their requests.

“To say that we’re frustrated would be an understatement,” said Leigh Candelas, who is a stay-at-home mom. “We’ve never been late on our mortgage payments and naively went through the refi process twice only to pay the appraisal fees for no reason.”

This is the risk inherent in borrowing money to buy any asset. There’s always a chance that the asset you buy loses value. I do feel bad for borrowers who have seen the market value of their houses decline and are now underwater, but if you take a 30 year loan and plan to wait the entire term of 30 years to pay off the balance to fully take advantage of leverage, you should accept the risk that comes with it. If you can find a bank willing to negotiate with you in the middle of the loan, then it’s a bonus, but there’s no reason to expect any lender to be sympathetic. There are times when refinancing is profitable for banks, and lenders might be willing to work borrowers at that time, but that is a luxury, not an expectation.

It can be frustrating to be trapped in a 6 percent mortgage when new loans are priced around 3.5 percent. It’s the same feeling you get when you bought your home for $500,000 and your new neighbors in a similar house just moved in, paying $250,000. It’s demoralizing to feel like a sucker, like everyone else was able to get a deal that wasn’t extended to you. If like most Americans you can’t or won’t pay for a house with a 100 percent down payment, these are the risks you have to live with. Even by paying a house with cash, the house could lose value later, but at least you don’t have to deal with lenders.

I’m not particularly sympathetic for borrowers having difficulty finding refinancing options. There’s no reason to expect a bank to adjust the interest rate when the borrower was of sound mind when choosing the fixed rate mortgage to benefit from the reduced interest rate risk. I am sympathetic in some cases, after all, there are many external circumstances that can make life difficult while trapped in a mortgage, but not when borrowers without cause expect banks to act against their own profits.

How freely should banks offer refinancing to borrowers who don’t qualify for the government-directed programs like HAMP and HARP?

Photo: [email protected]
CNN Money

Published or updated September 3, 2012.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 5 comments… read them below or add one }

avatar 1 Anonymous

I think that it stinks but no one in their right mind should lend someone more than their house is worth while only taking their house as collateral. When you make these decisions they are long term decisions but people lost sight of that and that is their fault.

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avatar 2 Anonymous

We’ve been in a similiar perdicament with the exception of we had an ARM, so we’re getting the benefit of the currently low rates however we’d like to lock in these low rates but the asset has depreciated 45% since purchase and the equity or cash it would take to pull that deal off is just not there.

Really, this is one the largest reasons our economic recovery has lagged and will continue to do so. It should be in the US’s economic interest to get everyone who has a balance into current rates. We’re not going to have these options because we aren’t a Fannie/Freddie or FHA so we won’t have a path to do so. The more people can take advantage of the existing market rates, the quicker our economy can return to full employment.

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avatar 3 Anonymous

I certainly have sympathy for people in that situation. The real problem there is that they are underwater and not eligible for government programs. The banks that hold the loans have no financial incentive to lower the rates so they keep the homeowners trapped in high interest loans. Other banks wouldn’t refinance since you’re underwater and there is no reason to take on risk of an underwater mortgage.

Some of these people could probably benefit from creative financing by borrowing some money elsewhere even at higher rates. Or unfortunately, the best answer may simply be a shortsale or foreclosure.

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avatar 4 Anonymous

It’s a real problem, and the root of it is that people don’t understand the dynamics of the economic cycle. The obvious thing is to know that house prices go up and down and you shouldn’t buy when prices are high.

But there’s a lot more to it than that. There is the psychology people don’t see. When money is free, banks throw money at you and keep telling you how smart and wonderful you are, but that is also when prices are high. And that, of course, is the WORST time to borrow and buy. Many (most?) people listen when the bank says “you’re worth this much, so borrow.” In effect they tie their identity to what the bank says about them. Those are the people who get trapped.

And those are the people who stay trapped.

When you put yourself in a position of dependence on the bank, of counting on them, they WILL disappoint you. They are not very smart as a whole, because they are the ones who want to lend to high risk clients when times are good, only to get caught in the (inevitable) next recession.

You can’t put yourself in a position where you depend on people/institutions who can’t even manage their own finances. (As in “I will avail myself of them in the future when I want to refinance” for example).

Here’s the strategy: buy when prices are low and only buy with a healthy down payment. When you do that, you make yourself a no-brainer for the bank, and you dictate the terms. When you buy in a recession, you take most of the price risk out of the equation: the odds that your home value will drop below your purchase price become very slim.

And that’s the result of your action, not the whims of the economy or a bank.

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avatar 5 qixx

I was reading this article and could only think about what you said in the Economic Downturn article. How much these two pieces of information could work together to my advantage. Not in the home market now. The goal might be to be ready to buy during the next economic downturn in 7-10 years. Then i’d gain the benefit of lower prices and low interest rates.

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