Q. I have a question that I don’t believe I’ve seen in your column. I encountered a problem during my recent attempt to refinance. I have excellent credit scores and a good government job. I have a mortgage balance of $210,000 secured to a property that I think is worth at least $450,000. —— After the application process, locking in the interest rate, signing and faxing documents, I received a letter in telling me that my application was denied. The lender found out that I had my house up for sale and took it off the market in January. I didn’t receive any offers at the price I wanted, so I decided to stay put. # —— The letter stated that I can’t apply for a refinance until the house has been off the market for at least six months. When I asked them to explain why, they merely told me that it’s their policy. —— I called a couple of banks, who all had the same rule. I still couldn’t get an explanation. It seems like a ridiculous rule. Can you explain it?
A. I can. Fixed-rate mortgage loans are pooled together and sold in packages as part of what are known as mortgage-backed securities.
Investors who purchase these securities expect a long-term income stream from their investment. In fact, most mortgage loans taken out carry no points, which minimize the fees to the borrower. In exchange for low fees for the purchase or the refinance, the borrower will accept a slighter higher interest rate.
The investor is happy to pay a “yield spread premium” in exchange for a higher rate. Over time, the investor will reap the benefit of the higher yield.
Here is a simple example: A mortgage investor offers two rates for a 30-year fixed-rate loan. One is at 5 percent and the other is at 5.25 percent with a credit of $2,000. If the borrower chooses the higher rate, he or she receives a $2,000 credit toward closing costs. If the borrower is short on cash, it may make sense to choose the higher rate. The investor is happy to pay out the $2,000 and receive a higher yield over the long term.
The fact that you had your house on the market indicates that you have a clear intent to sell the property, which would result in an early payoff of the loan.
If the loan is paid off early, the investor doesn’t get a chance to recoup the $2,000 in the form of a higher interest rate.
Even if you have a legitimate explanation of why you took the house off the market and sign an affidavit that certifies your intent to remain in the property, lenders and mortgage investors still see your history as a sign that your mortgage loan may be short-lived.
This also explains why “bridge loans” are so expensive. A bridge loan is a temporary loan that provides funds for a down payment on a home that “bridges” the gap between the time a borrower buys a new home and sells his existing home, ultimately freeing up equity to pay off the bridge loan.
Lenders offering bridge loans charge hefty fees because the interest stream is likely to be short lived.
Don’t give up. Prior to writing this, I made some inquiries with my investors and found two lenders who don’t have a rule that you must wait six months to refinance. They merely want a copy of the canceled or expired listing and a statement from the borrower indicating an intent to remain in the property for at least six months.
Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at firstname.lastname@example.org.