Sunday, December 20, 2009

The Mortgage Refinance Dilemma

Despite Low Mortgage Rates, Homeowners Can't Refinance by David Streitfeld of The New York Times reports the difficulty of refinancing a home mortgage due to declining home values. Even though a homeowner is current and can make the lower payments on the new mortgage, the lender won't refinance the mortgage since the property is below the value of the mortgage. So it appears the lender would rather have the owner potentially walk away from the higher interest loan, than give the person a lower fixed rate mortgage at the same amount of principal.

I had a similar experience with our lender, but for a different reason. Since taking early retirement in 2007, we have been living off our savings, both principal and earnings. Our income from wages, interest and dividends is low, which is what our bank considers when make the loan. The bank does not include income from capital gains, e.g. the sale of stock, since the amount is not predictable. Thus, even though we were comfortably making payments, had 60% equity in our home, and enough cash to pay off the mortgage, our lender would only qualify us for less than 1/2 of the remaining principal, based on the predictable sources of income, wages, interest and dividends. Our decision? We simply paid off our mortgage in May, 2009.

While I understand the basis for the lender's decisions, it doesn't meet my standards of common sense logic. Since the loan already exists, why not refinance the existing principal to a lower monthly payment, especially if the owner has a job or liquid assets to cover the monthly payment? In my opinion, during the housing boom, many lenders ignored common sense logic and lent money to borrowers with insufficient income or savings, and now during the housing bust, lenders are again ignoring common sense logic and not lending to people with sufficient income or assets to comfortably make the payments.

That seems to be the nature of bubbles, i.e. standards are too loose during expansion, and stanards are too tight during recovery.

For more on New Beginnings, check back every Sunday for a new segment.

This is not financial advice. Please consult a professional advisor.

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