Lenders Reluctance in Refinancing Underwater Mortgages

Apparently, it looks like it may be almost impossible to get any kind of refinance for mortgage if the amount you owe is greater than what the property is appraised for.

Elizabeth Duke of the Federal Reserve says that mortgage lenders’ concerns of being stuck in the bad loans of someone else are main hindrances to the refinancing of underwater mortgages.

This is one of the main reasons why the Home Affordable Mortgage Program (HARP) of the government has had difficulties in assisting homeowners with very little or below zero equity, added Duke.

The challenge according to Duke is that lenders are worried that if they decide to refinance underwater mortgage via HARP, they might need to purchase back the loan from Freddie Mae or Freddie Mac, the holder and guarantor of the loans, in case it shows that the original underwriting of the loan has problems.

Because of this, they are hesitant to refinance mortgages originally made by another lender even if the current owners of the loans are Fannie Mae and Freddie Mac. Through what is called the putback process, Fannie Mae and Freddie Mac may ask the lenders to purchase back the mortgages that were not underwritten properly. Thus, if the loan is later on refinanced by another lender, it is responsible for it.

This is only one of the four major concerns causing an obstacle to the mortgage refinances of HARP, said Duke. Other problems include pricing on loans that are risk-based that leading to more refinancing cost; hesitance of second lien holders in putting their loans under a refinance mortgage; and rejection of mortgage insurers to new loan’s re-underwriting even if this will lower the default risk.

Duke said that what occurred was the application of mortgage lenders and insurers of the same criteria as that of the new loans in the refinancing of low equity and underwater mortgages.

She added that removing these obstacles to refinancing will help lower the general credit risk of lenders, keep homeowners secured and provide overall support to the economy.

One of the things that is continually asked these days is “Should I refinance my home mortgage?”

Things are moving so quickly with the economy, that it is no wonder that you may be confused and not sure whether or not to get a mortgage refinance.

The recent downgrading of the US credit from AAA to AA+ was a big hit to the nation and many people are trying to work out whether or not that is going to have an effect on home mortgage interest rates.

Keep in mind, Fannie Mae and Freddie Mac are part of the Government so the downgrade affects the two largest mortgage holders in the nation.

Additionally, the FED has announced that rates are going to stay low for the next 2 years. When the FED says low, that means close to zero.

I’m going to talk about things to think about before refinancing, but before I do, I want to say that it may be a good idea to refinance if you have great credit, and the interest rate you lock in can drop your monthly payments by hundreds of dollars.

Three Factors to Consider Before Refinancing

Recently, the Fed announced that they are maintaining the low interest rates until the year 2013. This is good news for those with good credit standing and for those with some home equity left because these individuals and families still have a chance to refinance their mortgage with the lowest rates. However, even if low rates are available at the moment, this does not mean that it is always a good idea to refinance. Here are the reasons why:

First, since low rates will continue for a little while, refinancing should not be rushed. Individuals and families can still make use of the time to build a strong credit so that when the decision is made to finally refinance, the lowest rates are obtained.

Second, it is best to consider the fees that come with refinancing. With this, it is best to keep the loan long enough to be able to justify the charges. Find out about the fees that you might potentially pay; those that you will surely pay; and those that you may or may not pay. Familiarity with these charges is important before refinancing in order to generate extra savings.

Third, note that points gathered from payments can be deducted in one’s taxes for the entire duration of the loan. With this, the cost of the loan will greatly decrease because of tax savings. For example, if an individual obtains a mortgage of $300,000 and pays 2 point or 2%, he or she has to make an upfront payment of about $6,000. If the person belongs to the 25% tax bracket, the savings will be 25% of $6,000 or $1,500 for the entire duration of the loan. When computing for the real after tax cost, the 2 points will generate a tax savings of $4,500. This is obtained from deducting $1,500 to $6,000.

Despite the low rates these days, it is best to think things through before refinancing. Consider and compute the costs and check if there are savings that can be obtained from it. Otherwise, postpone refinancing if after a thorough computation, it ends up as a bad deal even when the rates obtained are lower.

Whether or not to refinance is really a personal choice. I have friends that have refinanced 5 times in the last year. And, everytime they have refinanced, they have saved hundreds of dollars. Their current interest rate will be 4%. Now, their mortgage is close to 1 million. They live in a home in Hawaii.

The point is, you need to make sure that you do the numbers, do the research and make sure that you are comfortable with the numbers.