Mortgage Q&A: Refi out of reach for many

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Mortgage rates remained astonishingly low this week, perpetuating the refinance boom that started several weeks ago. I’ve been in business for 18 years, and I have never seen rates as low as they are today.

Though I am buried with refinance inquiries, I find myself turning away many more homeowners than in previous refi booms. It’s a shame, but there are a lot of explanations.

The lending landscape has changed completely compared to just a few years ago. The loose underwriting standards that were partly to blame for the credit crisis have, in my opinion, overcorrected. Homeowners with substantial assets but little or no income, such as retirees, are having a tough time getting a refinance closed because lenders require a verifiable income stream.

I have found that folks with little income who have several hundred thousand dollars in the bank cannot get approved for a mortgage, while an applicant who has no savings but a documentable income stream has no problem getting approved. This makes no sense. Why wouldn’t an underwriter treat the retiree’s giant savings account like several years of income already earned and in the bank?

Falling property values have locked a lot of homeowners out of the refinance market. It is a fact of life that real estate values can drop, and many homeowners who bought at the peak of the market do not have the necessary equity.

If your credit score isn’t perfect, you still may be eligible for a refinance, but expect to pay a higher interest rate. This can make a refinance impractical for some folks.

The purchase market also hasn’t been given the boost one might have thought by the low interest rates. This also is easy to explain.

First, for all of the reasons stated above, there are fewer eligible buyers. Second, folks who would like to move up cannot sell their existing home without taking a big loss, so they are forced to remain in their current home.

Still, institutional investors who purchase mortgage-backed securities eventually will realize that the loans being approved today are good loans with very little credit risk.

At the same time, one would hope that the lenders underwriting these loans eventually will approve loans based on the very important concept of a borrower’s ability to repay the loan. Underwriting today appears to be based upon meeting certain criteria, regardless of whether the borrower demonstrates an ability to repay the loan.

If a borrower is seeking to refinance a $200,000 loan secured against a property worth twice the loan amount, has $1 million in the bank and perfect credit, it is very possible he will not be approved for a refinance if he doesn’t have sufficient income. It’s very clear, however, that he has the ability to repay the loan because he simply can write a check from his bank account.

Let’s hope common sense will prevail before the rates shoot up again.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to Henry Savage” href=”mailto:henrysavage@pmcmortgage.com” target=”_blank”>henHenry Savage” href=”mailto:henrysavage@pmcmortgage.com” target=”_blank”>rysavageHenry Savage” href=”mailto:henrysavage@pmcmortgage.com” target=”_blank”>@pmcmortgage.com.

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