While interest rates cuts pile up so do mortgage denials. Lured by the Fed's actions and the pressing need to reduce their mortgage payments, hundreds of thousands of applicants joined the refinancing bandwagon. The prospects of saving money in this tight credit environment seemed very attractive.
Changing Game.
What these would be borrowers did not realize is that the rules of the game have changed. No more easy credit: documenting income is only one of the many hurdles facing them. The continious decline in property values is another one: nationwide appraisals are coming lower than expected. The loss of equity leaves many owners outside of the of the qualifying parameters that lenders have activated.
Low Appraisals.
Appraisers have to account for declining valuation in their reports and no one wants to be accused of turning out inflated values. Reports of equity loss ranging from five to twenty percent are not uncommon in certain areas.That deficit alone is responsible for failed refinancing. In some cases, this leads to foreclosures which in turn add to the pool of unsold properties. The scenario is similar to the dog chasing its tail.
The Effectiveness Of Rescue Programs.
They fall into two main groups: government mandated and industry backed ones.
Government Efforts.
To date there have been two government rescue programs based on FHA insured loans.
Fha Secure targets subprime borrowers facing mortgage resets. The borrowers have to be making timely payments before the rate increase. They can refinance with Fha insurance provided that they qualify. The program is not manadatory meaning that Fha approved lenders do not have to participate and many chose to stay away because they were already dealing with their own risky borrowers and saw no need to take in new ones.
The second government program simply consists of increasing Fha insured mortgage limits and a temporary boost of the amounts that Fannie Mae and Freddie Mac can purchase. Currently these two entities are limited to loans not exceeding $417,000 for single units properties, Fha insured limits are set lower and vary by area. The combination of these two measures is aimed at making more funds available to borrowers who are facing loan size and pricing constraints specially for the so called jumbo loans.Private Sector Programs:
They include loan modification, interest rate freeze, credit counseling and the so called Lifeline initiative recently announced. What these programs have in common is volontary nature. Lenders will selectively remodify mortgages, freeze rates or extend the foreclosure date by 30 days in order to try to negotiate new terms with the borrowers. No lender will continue to extend credit to unqualified borrowers and they should not.
The Fundamental Issue of Value.
Lost in all these initiatives is the fact that no borrower will accept to make payments on a mortgage that is higher than the collateral. Until we re-evaluate the assets, i.e. base any new or reworked loan a the current value, foreclosures will continue unabated. This means that lenders and borrowers must recognize the losses caused by declining property values. Anything short of that will simply prolong the crisis. No one is willing to admit that houses purchased during the last few years and the mortgages they carry are out of step with the realityof today's market place.
A Buyer's market.
The imbalance between the supply of homes and the availablity of willing and qualified buyers is favorable to the later. This trend will continue until the current inventory begins to decline. Buyers have the choice among properties owned by lenders, builders and private sellers. The atmosphere of low interest rates makes it possible for those who meet lenders' requirements for down payment, credit, verifiable income and assets.
Before contemplating a purchase or a refinance, borrowers are advised to get pre-approved. This will avoid having to suffer a denial at the time of application.
Address your questions and comments to info@p2funding.com
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