Another Refinance Boom - With a Difference

With rates having nose-dived in recent weeks, we're experiencing a refinancing mini-boom. Now that rates have fallen by about a full percent from where they were most of the last year, people are waking up to the fact that refinancing now can save them some serious money. Things finally got low enough a couple days ago that I sent out individual e-mails to most of my clients for the past two years. Underwriting times are up to five business days - a full week. Mind you, refinancing booms are not going to save the lenders' who are in trouble, and 90 percent plus of the refinance dollars are just lenders feeding off each other. But the choice for any available lender is to offer the lower rates and compete for clients, or don't and lose them. It's not like people are settling for free toasters any more.

Unlike all of the recent refinancing booms, this time a lot more people have a couple extra issues.

The lesser one, measured by number of people who have this issue, is being able to qualify for a loan. A year ago, while make believe loans were still happening. people were being qualified for loans on the basis of being able to detectably fog a mirror. Loans for 100% of the value of the property were being done on a Stated Income basis by even A paper lenders. Forty and Fifty Year Loans, interest only, and even negative amortization loans - unsustainable loans were over half of all purchase loans locally. Anything to make it look like the payment was affordable, even if it wasn't. But if that's the only way the people were going to qualify for a loan, what happens when they're not available any longer? That's right - they're stuck with what they've got until they can qualify for something more traditional. Lower rates may help a few around the margins, but most of these folks who signed up for Make Believe loans are going to have to sell before they're going to get their lives back on track.

The other issue, that loan officers mostly haven't really had to deal with for years, is impacted Loan to Value ratios. When prices fall, as they have locally, that's a problem. Locally, the average properties are down about 25%, but that's an average only. So properties that people bought at the peak of the market might be 75% of the value they paid, and unless they put at least a 25% down payment into the property, they're "upside down", and owe more than the property is currently worth. Being upside-down is no big deal if you have a sustainable loan. You keep on keeping on, and eventually things will go back to normal. You pay the balance down, values will go back to at least where they were, and all will be right with the world. But if rates drop while you're upside down, you're not really in a position to take advantage of them. I've written an article on how you might be able to refinance if you're upside down, but those steps are not going to get you the great rates people who have more traditional loan situations will get. Even people who have been in their properties for much longer are finding out that they don't have anything like the amount of equity they had two years ago. Even if they bought a decade ago, if they've taken cash out, they may quite likely be in a situation where don't have twenty percent equity. When this happens, people are going to either split their new loan into two pieces or pay PMI. Since holders of second trust deeds are not currently willing to go above ninety percent of the value of the property, if you're above that threshold, it's PMI or no loan. I've talked to any number of people in the past week who don't want to pay PMI, and that's fine, if they don't mind not getting the loan. It's not like you're shopping for produce at the market, and can pick and choose what you want. PMI goes with all first mortgages over eighty percent of value - it's banking regulations. Regulated lenders cannot lend on those conditions without it. Some lenders may camouflage it with lender-paid mortgage insurance, but you're still going to pay it. Lenders don't have to tell you about it at sign-up, either, and they don't have to disclose the fact that lender paid mortgage insurance is built into the rate they quote. But don't let fear of PMI control you - just add the additional costs into the computations of whether a particular loan is better than another, or worthwhile at all.

Other than these two issues, things are pretty similar otherwise. I've seen some people claiming that you should go up to forty-five day rate locks instead of thirty, but I must disagree. With underwriting times at five days, you should not need longer than a thirty day rate lock (or purchase escrow) if you and your loan officer have your act together. Purchase loans go through different underwriters at most lenders, and they have no right of rescission. Even in summer 2003, when refi underwriting was at 33 days, purchase loans were still getting turned in no more than four, and funded in two to two and a half weeks. Even refinance loans can still be done in under 30 days - if your loan officer submits a complete clean package to begin with, something there's no reason not to do in the case of a refinance. Furthermore, if you make a habit of submitting nice clean complete packages, underwriters will start cherry-picking yours out of the pile when they don't have enough work time left for a piece of garbage. You can't really control this or count on it, but it sure was nice to have the loan come back approved in three or four days, when the competition was taking four weeks. My median last year was seventeen calendar days from lock to fund - adding five days of underwriting only brings us to twenty-four (Don't forget the weekend), and that's forgetting that underwriting was talking a day or two even then. Longer rate locks are more expensive, so you don't want to pay for what you're not going to need. But you do have to have your ducks in a row from the beginning to make it happen.

Caveat Emptor