Refinancing your mortgage may not be impossible right now, but it sure will require a lot of work.
A confluence of factors has come together to make mortgage lending particularly difficult in the slumping market, and the problem is particularly troubling for refinancers who are looking to get out from under their adjustable-rate or interest-only loans.
Plunging housing prices, tightening credit requirements and ever-rising interest rates are all combining to make the process far more difficult than it was even a year ago.
The problem is especially acute for borrowers of jumbo loans—mortgages that exceed $417,000—that are not insured by Fannie Mae and Freddie Mac and are thus less attractive to investors on the secondary market.
Mortgage experts, though, say there is hope, but it requires perseverance to work through the array of obstacles in the process.
"This takes time," cautions Ellen Bitton, CEO of Park Avenue Mortgage Group in New York City, a broker that works with a variety of lenders to find the right package for borrowers. "There's no magic bullet right now. There is just diligence and working through each case individually with the client."
Keys to Success
There are four main tenets to successful refinancing applications, Bitton says: Good credit, high loan-to-value ratio for the property in question, liquidity from the borrower, and the ability to document income.
In the free-wheeling lending practices of the earlier part of the decade, loans with low or no down payments to borrowers who often didn't even have to prove their income were common. No more.
"The pendulum has swing from being overly aggressive with mortgage lending to overly conservative with mortgage lending," Bitton says. "I don't consider prudent lending (giving) 105 percent mortgages to people with bad credit scores."
Mortgage brokers will work with clients who have been rejected by their primary lenders to try to shore up any deficiencies in the key areas. But they're not always successful, with most of the failures coming when a property has just depreciated too much to be considered for a refinancing loan.
"If it's a loan-to-value issue, if they were approved under a 90 percent loan and their property has devalued, then there really is no recourse," Bitton says.
Other problems, though, can be addressed more readily.
Bad Credit? It Can Be Fixed
Michael Riemer, senior vice president at Guard Hill Financial in New York, says his company works closely with clients who have credit issues and is often successful at rehabilitating low scores and getting loans.
"It's much harder to get financing for people with low credit scores. But the answer is not to put somebody into a lender who will refinance at a high rate and they'll be right back where they started from," Riemer says. "The answer is to help somebody improve their credit score so we can help them get the lower rate today that they actually need in order to make the payments on that house."
One of the keys Riemer cites for his brokerage's success is the differing array of lenders with which they do business. Some lenders, he says, will look past basic credit score numbers and into why the scores are so low. Others will apply different criteria for loans or be more assiduous in determining an accurate appraisal.
Choice, Riemer says, is imperative.
"Very often a person will be financeable, just not to the bank they would normally go," he says. "We have so many loans under our umbrella that we can determine what lender will do that for them even though two out of three won't. There will be certain situations where we will not be able to refinance someone, but it's pretty unusual."
One of the areas where mortgage brokers will focus in difficult cases is on determining an accurate appraisal to establish an adequate loan-to-value ratio.
"The values are what the values are," Riemer says, but points out that "it's more a question of making sure the appraiser was comparing the home against comparable homes. For that you need a strong appraiser, someone who knows the area, knows the value, knows the nuances."
For Bitton, she deals with high-end properties in Manhattan and has seen wildly disparaging numbers come from appraisers.
It's a part of the process where she would rather not get involved, but if something jumps out she will act.
"If it has to do with loan-to-value, you can show perhaps that the appraiser was wrong. If you have documentation that will disprove an appraisal, I must say it's not rocket science," Bitton says. "We're not in the business of disputing appraisals when they don't work out, but if we have first-hand knowledge or we can show that an appraiser looked at a property and did a really poor appraisal ... that can easily be disputed."
Other factors, though, are beyond the control of borrowers.
Fannie, Freddie Try to Help
In the current lending climate, with foreclosure rates soaring and banks struggling to maintain stable balance sheets, it's extremely difficult to get a loan of any kind.
Fannie Mae and Freddie Mac, which buy mortgages on the secondary market that are backed by the government, have tried to help the higher-end market even though the two entities are usually restricted from high-end, or jumbo loans. Congress earlier this year raised the limits that Fannie can guarantee to $625,000, but only in certain markets where the median housing cost exceeds jumbo limits for Fannie and Freddie.
Diana Olick discusses whether Freddie Mac can stay afloat in video at left.
For the year, Fannie and Freddie will back about $10 billion of jumbo and super-jumbo loans--amounting to a sliver of the business the two government-sponsored entities do each year.
"It's fairly small," says Brad German, a Freddie spokesman. "How this has expanded the jumbo segment overall in these high-end markets, I don't have the data at that level. Most of it is going to be anecdotal at this point."
To be sure, the intervention of Fannie and Freddie in the jumbo markets has indeed lowered interest rates for the mortgage class, though a 30-year fixed mortgage is still at 7.42 percent, a full point above a conforming loan.
But until the other issues get worked out in the mortgage market, particularly the reluctance to lend at any rate and the slumping home prices, refinancing will be a tough go for borrowers in any class.
"I think it's a longer-term cycle because the tightening of credit has been driven by loan quality," says Greg McBride, senior analyst at Bankrate.com. "Regardless of how much capital lenders have at their disposal, they will remain squeamish about risk for some time to come."
Even if rates come down, McBride says prospective borrowers could "win the battle but lose the war" because property values will fall below refinancing guidelines.
"A year ago this looked like something that would clear up quickly," McBride says, "and at this point you can assume it won't clear up soon."