- The Washington Times - Thursday, July 1, 2010

Federal Reserve Chairman Ben S. Bernanke met with the Board of Governors last week only to release more of the same news: Interest rates will remain low for “an extended period” because of the continuing sluggish economy.

News, in fact, has been gloomier than usual. The European debt crisis is of huge concern, as Greece and Spain are close to default. Domestically, there’s talk about a refreshed housing crisis. Sales of new homes fell 33 percent in May, shocking most analysts, as they already were expecting a disappointing drop of 20 percent.

Inflation has not heated up, which is another surprise. Many thought the $800 billion in bailout and stimulus money thrown into the American economy would have created inflation by now. So far, there’s been little indication that prices are about to spiral out of control.

This news, coupled with the European debt crisis, is inducing worldwide investors to put their money in the good old USA. The demand for Treasury bonds has been strong, keeping interest rates extraordinarily low. Because mortgage rates follow Treasury bond yields, my telephone is ringing off the hook with refinance inquiries.

When reading about mortgage news in various real estate publications, I find a different story. Many of my peers seem to think today’s low mortgage rates aren’t generating a lot of refinances. There appear to be three reasons for this. First, falling property values have made a lot of folks ineligible to refinance because they have little or no equity in their home. Second, the overtightening of underwriting guidelines is making even more folks ineligible. Third, a lot of mortgage professionals say the remaining eligible borrowers out there already have refinanced.

I only partially agree with these reasons. Indeed, property values have fallen, and many folks simply cannot take advantage of today’s rates. Still, the so-called Refi Plus program is hugely popular because it allows folks to refinance to market rates even if they have no equity in the property. There are strings attached, which do push out a lot of folks. For example, if a borrower is paying private mortgage insurance or is carrying a second trust or home equity line, he is, for practical purposes, ineligible for a Refi Plus program.

Today’s unreasonable underwriting standards are as impractical as the lax standards that created the credit mess. Common sense doesn’t exist in mortgage underwriting. Here’s a good example: A borrower with a modest credit score of 680 who has 20 percent equity in his home, verifiable income and no savings is eligible for a good rate. But a retired person on a low fixed income who has 50 percent equity, an excellent credit score of 800 and more than $1 million in the bank is not likely to get approved for the same loan because of insufficient income. The fact that he could pay the loan off four times over apparently doesn’t matter.

My biggest disagreement with my peers in the press is the notion that all of the eligible borrowers have already refinanced. Not true. For example, I have many clients whose situation is similar to this: A borrower who is 10 years into a 30-year loan with a rate of 5 percent is refinancing to a 15-year rate at 4.25 percent with no closing costs. The mortgage payment doesn’t change, but the borrower shaves five years off the term of his loan, saving him multiple thousands over time.

All homeowners should, if they haven’t already, pull out their promissory note and determine the details of their mortgage. A good loan officer will be able to recommend whether a refinance is in order.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to henrysavage@pmcmortgage.com.



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