Trouble with Refinancing

Remember during the Great Housing Bubble when any time someone got into any kind of trouble the answer was just refinance. Needed to get some more cash- just refi cash out. ARM rates going up soon - just refinance. Mortgage brokers told there clients the rates were great and they could just come back and refinance in a few years when things went up. Now that many mortgage companies are out of business and refinancing is getting harder than ever with stricter and stricter requirements. It is interesting to read this article titled Is a refinancing boom coming? from the Sarasota Herald Tribune. Lets take a look -

A dramatic drop in mortgage rates has motivated some homeowners to wonder if they should refinance. A better question might be: Are they able to refinance?

Back when house prices were zooming upward, it was easy to refinance a mortgage. Lending standards were loose: You could borrow 100 percent of the home's value, you didn't have to document your income, and no one cared if you had a few late credit card payments in your recent credit history.

Lending requirements are a lot more strict now than they were during the housing boom. In many areas, house values have fallen. The combination of these two factors means a lot of homeowners will have to sit on the sidelines for this would-be refi opportunity. Over and over, mortgage bankers and brokers say that the lower rates are good news "provided you have the ability to qualify."

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In you live in South Florida, Southern California, Phoenix, Las Vegas or another market where the bubble popped violently, you might not be able to refinance even if you made a 20 percent down payment two or three years ago. Prices have fallen so far in those markets that many homeowners owe more than their houses are worth. Those people can't refinance unless they have enough cash to make up the difference between the loan balance and the home's value.

Even if the house is worth more than the mortgage balance, a refinance might not save any money if the new loan would require mortgage insurance. Generally, mortgage insurance is required on home loans for more than 80 percent of a house's value.

As for a refinance boom coming - the only way we can see that happening is that part of the huge socialization bailout of Wall Street settlement would be to allow those with ARMs and Option ARMs to refinance into 30-year fixed without penalties and at affordable real-time market prices. That would require huge write-downs from the 2005 and 2006 housing price highs. That would wipe out all prepayment penalties.

In too many areas people most likely wanting a refi are already in too much financial trouble to qualify.

It will be interesting see how things sort out for Main Street in the next few weeks.