Refinancing Not So Easy for Homeowners

Every piece of housing news printed these never fails to mention the historically low mortgage rates available to borrowers, but as many borrowers come to find out those …

Every piece of housing news printed these never fails to mention the historically low mortgage rates available to borrowers, but as many borrowers come to find out those rates are not as “available” as it sounds. Once homebuyer discusses how he tried to refinance a recent home purchase and was told he either did not qualify for refinancing or was unable to do so because of who held the note on the house: this despite using one of the four “big banks” to make the purchase and having the loan secured by Fannie/Freddie. He and others are calling for a more transparent home financing system, although this seems unlikely given the players involved and what is at stake. For more on this continue reading the following article from TheStreet.

Mortgage rates are at a record low, but try to borrow at the Freddie Mac 30-year fixed-rate mortgage. It would be nice to be able to refinance a mortgage at 3.56%, but as I found out, it’s next to impossible to do so.

As I have been saying, a recovery in the housing market is a key to sustaining an economic recovery. When potential home buyers and home owners looking to refinance can’t take advantage of these low interest rates, the U.S. economy will remain in the doldrums.

I say that mortgage rates should be even lower. With the yield on the U.S. 10-Year Treasury note at 1.5%, a 30-year fixed-rate mortgage should be no higher than 2.5%.

My son and I bought a new home three years ago from a publicly traded home builder. Since most major builders have a finance arm it was relatively simple to get a reasonable 30-year fixed rate mortgage rate. Our mortgage rate was 4.5% on a FHA loan, which I thought was a steal with the yield on the 10-Year U.S. Treasury at about 3.00%.

Even though we put 20% down for this mortgage they needed us to buy the FHA insurance to close the loan. This added $89.47 to every monthly payment. We also set up the mortgage to place in escrow all taxes and insurance costs. We were the ideal home buyers.

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On June 1, 2012 with the 10-year yield at a neat 1.5%, the Freddie Mac 30-year mortgage was pegged at 3.67%. I tried to refinance. Since our mortgage servicer is one of the four "too big to fail" banks I thought we could get a fair deal.

Not so fast. They told us that we qualified for the FHA Streamline Financing Program, but under this program our new mortgage rate would be 4.00% based upon the Ginnie Mae securitization program, as our mortgage was purchased by Ginnie Mae. This prevented us from getting the posted Freddie Mac rate at 3.67%. Adding to the frustration they told me that the FHA guarantee rate would rise from $89.47 per month to $214.90. This plus a $2,500 closing fee queered the deal.

I asked the mortgage banker at this big bank how to eliminate the FHA guarantee. The banker told me that I could not for another 24 months. At 60 months, I could eliminate the FHA guarantee and its cost, if the loan balance was 78% of the outstanding mortgage.

Their final response was that our current 4.5% mortgage rate was a very good rate even with the Freddie Mac rate at 3.67%. I said, not at 217 basis points above the 10-Year U.S. Treasury yield. I laughed and moved on.

New Wrinkles

In my preparation for this story Thursday, and with the Freddie Mac 30-Year fixed rate mortgage rate down to 3.56%, I called the banker again for a new quote. I asked if I qualified for the Freddie Mac rate, and of course the answer was no.

This banker told me that the Freddie Mac mortgage rate was only for purchases, not refinancings. To qualify you had to put 20% down, pay at least a point up front and have a credit score of 800 or better.

To make matters more frustrating the FHA refinancing rate was up to 4.25% from the 4% rate quoted on June 1. It was thus not economically feasible to refinance again.

To add to my frustration, I asked if I qualified for the FHA Home Affordable Modification. Not surprising, the answer was no again, as this program would only apply if my mortgage was owned by Fannie Mae or Freddie Mac.

As my experience shows it is next to impossible to get mortgage relief even with the 30-year fixed-rate mortgage at a record low 3.56%. As I was preparing there were two pieces in the mail touting that I was pre-qualified for the FHA Streamline program. One had a 3.50% rate, the other at 3.25%. When you read the fine print it said that the rate could be set higher after the closing. To the trash went this mail.

I have been suggesting that we need a simple mortgage modification program for all homeowners, funded by a Federal Reserve Facility that channeled funds to the FDIC for use by community banks to finance or re-finance mortgages at 100 basis points over the yield on the 10-year U.S. Treasury. With the yield on the 10-Year at 1.50% the 30-year fixed rate mortgage would be 2.50% with no strings attached.

If you are current on your current mortgage, you automatically qualify. At this rate, the woes of the housing market would end, and the economy would recover with many construction jobs created.

This article was republished with permission from TheStreet.


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