Here is a consumer piece I wrote recently that I thought you would find interesting.
Download Five Reasons Why Refis are Hard
Why is Just Getting a Lower Mortgage
Rate Such a Hard Thing To Do Today?
Written by Brian Koss
Well, believe it or not, both lenders and borrowers are asking that same question right now. Lenders are turning away as many as 50% of the applications they take and spending 2-3x more time on each application. This pain leads to higher levels of anxiety (all around), increased costs (which always trickle down), and lots of disappointment and unnecessary friction. In order to set the right expectations, I would like to give 5 of the top reasons why refinances are so difficult and what you can do to avoid the friction.
1) Paperwork. Since the late 90’s the trend in lending was to simplify the process and avoid the paperwork. A full two years tax returns and statements of every asset and debt for 3 months along with no questions. It peaked with a good FICO score allowing you to simply buy a home with no money down and no income or assets verified. Today those same FICO readings give you zero benefit in documentation relief. Everybody – rich or poor, on-time or not – has to produce the documentation. You are presumed guilty until proven innocent, so any recent changes in employment or variableness to income is a big issue. Also any change in your recent asset history is a big issue and please no significant changes beyond paychecks going through your accounts.
2) FICO’s. Loans to a fault were being done for individuals whose credit score was as low as 500. 580-620 was considered OK. 620-680 was considered good to very good and 680 and above was great. Today loans below 620 are borderline impossible. No stories and no explanations will help. Pricing is adjusted for loans below 720; before it was 620 or 580. This eliminates many of the refinances and purchasers in the market. But the good news is that Credit Simulators are available from the pro-active loan officers out there who can show a borrower what is exactly affecting their score and show them what actions to take to improve their score.
3) Values- the majority of time spent waiting for a decision on a loan is spent waiting for an appraisal to actually arrive at our desk from a busy appraiser and/or waiting as the underwriter scrutinizes the math of how the appraiser got the value. Frequently the underwriter these days will ask for explanations or more examples of comparable sales, comparables closer to the home, more like the home or more examples of like homes on the market, etc A few years ago values were frequently determined using Automated Valuation Methods. These AVMs spit out of a computer model similar to a Zillow saving hundreds of dollars for the customer and weeks in the process.
Lastly on value is the issue of loan to value. All loans today require much greater down payment or equity. All property types are affected by this but especially jumbo, investor, second home, multi-family, condos, and any unique properties or situations. There can be as much as an extra 20% required, plus there is a greater need for cash reserves after closing. The bottom-line is, it requires much more money to get financing today and we need to know where it all came from. Be prepared to show 3+ months statements on every asset you have that can help show your strength, reserves, and where your deposit is coming from.
4) HVCC--Adding to this appraisal issue is the new appraisal process Home Valuation Code of Conduct or HVCC that just started 5/1/09. This regulation prohibits lenders and brokers from making contact with an appraiser during the process or being involved in the selection of an appraiser. This means to the consumer that they will have to pay for the appraiser upfront; they won’t be able to get an opinion of value upfront on a refinance to see if it’s even worth even doing and you are not guaranteed to get an appraiser who really knows their market.
5) Subordination – A term that many consumers haven’t heard before is a major culprit in this painful finance process today. For those refinances out there that have an existing second mortgage, you need to have your second lien holder subordinate (stay in second place while we pay off your existing first mortgage and replace it with a new lower monthly payment first mortgage). Sounds like a no-brainer right but you’d be surprised. Too many times the second lien holder wants to force you to pay off and close out their second position, and therefore says no. The process of subordination involves us completing the whole file – all of your documents, our documents, and the appraisal--- which can take 4-6 weeks, then sending it to the second lien holder for their approval which can take 2-6 weeks. Most rate locks are at 45-60 days and therefore we have a problem. In the past we would just put a new equity line or second mortgage and get around this issue. But today there are virtually no qualifying seconds available so we are stuck begging, in line with everyone else.
To all of the above you add on the new HARP program allowing the first mortgage refinance to go as high as 105% LTV, which then requires the underwater second lien holder to subordinate at a pretty lofty position, adding to the subordination woes. All the modifications for all the people who don’t fit into these new terms slow down the major servicers and their response times to subordinations and payoffs etc.
You can also add the following:
Warehouse lines that independent mortgage bankers use to fund loans are 80% less than two years ago eliminating billions of dollars in capacity.
Fraud checks, ID checks, 4506 IRS checks, value checks, are audit processes that
are all now being moved to the front of the process adding time and money.
Technology has not kept up with the new flows of business and massive
regulation. During the last 10 years little time was spent reinvesting in
R&D, so adding the new requirements to antiquated systems is a recipe for
disaster everywhere. Plus there are few solvent technology companies available
to compete today.
Our industry had shrunk our processing staff significantly from 2006-8; many left the industry to find more stable work. Also many of the employees of the last 10 years did not learn business the right way and struggle with the new skill requirements.
The story is not over yet. There are many more changes planned by investors and regulators to come. The bottom of this cycle will probably look more like a W than a V bringing another wave of opportunity wrapped up in confusion. Hopefully we can get the message out to the public so we can manage the expectations irresponsibly set in the past.
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