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Waiting for the World to Change and Other Refinancing Mistakes

We recently caught a rare glimpse of what lies bubbling beneath the surface of this soup we call the MORTGAGE MESS.

They are the SILENT MAJORITY who didn't walk away from their mortgage. They stayed, paid, and prayed.

And guess what? Not only do they WANT to refinance, they just might cause the soup to boil over if they get mad enough.

While many in the mortgage industry are saying "refinances are DEAD", the Silent Majority doesn't agree.

They just don't know how to make it happen so they have remained silent, frustrated and hoping that "the world would change".

They wait for rates to drop even though that isn't THE REASON THEY NEED TO REFINANCE.

Well, nothing is changing...for the better, anyway. And often the REAL REASONS for a refinance are clouded by our obsession with RATES.

When the 2 words "Lower Rates" were spewed out as a part of the Freddie/Fannie takeover, phones rang. A half point drop brought 'em out of the woodwork and the soup began to bubble.

The SILENT MAJORITY was reminded they are unhappy with their real estate situation. Even though the SM is NOT the focus of media attention (like all those people who are foreclosure statistics), these people need our help, too.

If we expect all those hard working solvent homeowners to PAY for the foreclosure mess, maybe they deserve something too?????

Should we spearhead a REFINANCE BAILOUT? At the very least, it is time to think outside the box and make refinancing something more creative than that tired old "lower the rate to lower the payment".

This refinance-boom-in-the-making is about so much more.

It is about eliminating RISK and ENHANCING LIQUIDITY. For some people, these things are important enough to make "better rate" a distant third choice as a reason to refinance.

RISK... as in adjustable rate mortgage or equityline that could go up. RISK... as in house that could drop in value. RISK... as in not being able to qualify because of tightening credit guidelines. RISK... as in that open credit on your equityline could become frozen by the lender at any moment.

LIQUIDITY as in the equityline has been frozen. LIQUIDITY as in the inability to sell or refinance the house due to declining values. LIQUIDITY as in cash out restrictions/elimination on many refinance loan products.

Old school thinking: Waiting patiently for rates to drop, not realizing the drop in the value of your real estate IS A MUCH MORE SERIOUS ISSUE than getting a half point better rate.

New school thinking: Sorting out your goals for refinancing and allowing your mortgage professional to lock in a low rate when a LOW DAY comes along.

And there WILL be future LOW DAYS.

I think we would all be shocked by the number of people who completely LOST their ability to refinance this year as a result of their house dropping too far in value.

Would you rather pay an extra half point or NOT BE ABLE TO REFINANCE altogether?

So while a lower rate is nice, maybe you should think outside the box if you are at risk of being CASH POOR and/or CAN'T SLEEP AT NIGHT thinking about what might happen if rates go up, or your home value goes down.

Innovative refinances are coming.

The CASH IN REFINANCE (Instead of CASH OUT)

The REFINANCE TO A HIGHER RATE to gain a lower payment

The REFINANCE from a conventional mortgage to an FHA Mortgage

The REFINANCE to a HIGHER PAYMENT

The REFINANCE the house you own WITH EQUITY to Pay Down the other house you own WITHOUT EQUITY.

The sooner we can get over the fixation with rate and understand the new reality of refinancing, the better chance we have of not burning the soup.

Knowing WHY you need to refinance is the first step of a successful refinance.

Having a creative mortgage professional that knows how TO KEEP YOU FROM GETTING BURNED is the second step.

Don't jump out of the soup pot and into the fire.

Written by Janet Guilbault, California Mortgage Expert Based Out of the San Francisco Bay Area.

Questions about refinancing your California property?

E-mail me directly janet@peregrinelending.com

Call me directly @ 925-627-2586

Posted by Janet Guilbault California Mortgage Banker/Broker on 09/23/2008 01:41 PM

Comments (19)

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19 Comments on Waiting for the World to Change and Other Refinancing Mistakes

SEP

2008

I read somewhere today that the Democrats are in support of a refinance bailout. Why wouldn't we push for that?

Mike: Would love to read about this. I will google it and then respond. My initial reaction is that usually those that make up these bailouts are not in the trenches enough to undersand what needs to happen.

And oh yeah, are way too free in spending taxpayer money.

@ Mike - The less the government intervenes in the Real Estate Industry, the better. At least that's my take. Their knowledge of the lending industry runs about as thin as Patrick Stewart's hairline.

Sorry Janet. "Knowing WHY you need to refinance is the first step of a successful refinance." Yup, that hits it pretty square on the heart of the matter. The WHY will get you to the HOW & WHEN.

Jason: Who is Patick Stewart?

The WHY has always been about rates. Is it possible that we can get beyond this? I am having a hard time with all of my fence sitters.

Even those that lost their equityllines after I warned them.

Oh, brother.

A sense of urgency...didn't you write a post with this in it? It is something our owner loves to say on a daily basis.

you are an awesome writer... are you interested in becoming a guest blogger for my increasingly-growing blog site?

Chris the implementer

Here. This makes my analogy a bit more clear:-) I did write that post about a sense of urgency. You will see the WHY turn into saving money and become less about rates. I don't care if the market rates are 8.5%, people will always need money.

Janet, The desire to refinance and more importantly the need to refinance are being hit head on in this market with so many borrowers no longer being qualified.

Richard: That is why I am suggesting that creativity and thinking outside the box will become highly prized by borrowers. There is almost nothing straightforward about figuring out a refi these days. They are much more difficult than a purchase in my opinion.

Clever thinking Janet... I wish we could count on a significant portion of the SM to think the same way and appreciate the logic enough to act upon it. It makes so much sense.

@ my Jason... I LOVE Patrick Stewart. But I dumped him for you :)

Jennifer: I still have no idea who Patrick Stewart is. But Jason is cuter for sure.

He is in Star Trek.

and Xmen.

Yes he is Janet. Especially when he smiles :)

SEP

2008

Unfortunately, it's always been about rates. And the message has always been the same. Rates seem to be the single obstacle in borrowers doing whats best for their situation. 12 years ago or so, I can remember 7.25% being a really attractive rate. It might take a while for the focus of 5.0% fixed on a 30 year note to be diverted to whats actually best for folks looking to refi. We're charged with that as originators. We'll keep fighting the good fight.

Always enjoy reading your stuff Janet! Thanks!

Good reading. Thanks.

Thanks, Janet. Great thoughts. I was talking to one of my AE's yesterday and she said she thought people with 80/20's, ARM's, etc. should be allowed to start over. Especially if they're upside down. Set the payment to the value of the home now and fix it at a 30 year fixed rate. She felt this would be better for the lenders than having to repossess a property they can't afford to keep. We are living in interesting times. The good news is I sense we'll be on our way back up sometime next year. Take care.

Paul

Janet, interesting post. I was intrigued with some of the linear progression on things like cash in refis. Lot to think about here.

SEP

2008

Janet... I guess I will jump in and be semi in disagreement with many of the statements. Yes, it can be more about the rate. But at the same time, education and explaining is more key than anything. Lowering your rate doesn't allows lower your payment. Not in a manner that makes sense. Example... it costs money to lower the rate which would lower the payment. You talk about equity issues. But you will chew up equity in a refinance. It comes down to goals... the borrower's goals and I will always stand by this first. The post should be about what you plan on doing or what you need to do, which will allow everyone to understand if it makes sense to refinance.

You said innovative refinances are coming... and then made like 5 statements... here are two that I am extremely confused about.

The REFINANCE TO A HIGHER RATE to gain a lower payment -- How is this done? Are you talking about possibly consolidating credit cards and such?

The REFINANCE to a HIGHER PAYMENT Huh? Why would one do this?

The REFINANCE the house you own WITH EQUITY to Pay Down the other house you own WITHOUT EQUITY. - My personal opinion on this.... too many people are getting way to wrapped up in the loss of equity. Real Estate is a long term investment. Why would you tell someone to refinance their home to pay down another mortgage, just because they have no equity? Just very curious on this one.

Overall, I will agree that people are obsessed about rates. But at the same time you talk about how hard it is to possibly refinance people. I'll say it all day... you can go up to a 97.75% on a rate/term when it comes to FHA. And a cash-out, up to 95% and a jumbo refi up to 85%. You can't get that with conventional loans. And as I stated, it costs money to refinance, so a lower rate doesn't always make sense, especially if you are one that screams equity issues. But then again, if you have a payment that you can handle, why care so much about the equity position. That is not the main reason for the foreclosures. Many are because people got into income issues... loss of job, less income... the subprime rates that adjusted... those loan officers that put the consumer into a bait and switch loan. But wait, I really don't have sympathy all the time for thise people. You can say NO. if it changes, you back out. And now people are screaming rape because of this. Nobody held a gun to their head to sign the papers. Common sense needs to prevail. Values will go back up. Many of us new that values were increasing quicker than it should have in many areas. Loan officers sold the whole idea that you could gain more in value. And many borrowers became greedy. Many thought they could buy and sell in a year to make money. Hence why I will say that real estate is long term. Hence a good part of this problem also. And again, I am getting tired of the average person screaming the equity issues. Do you invest in the stock market hoping to make a big buck and then pull out in one year? It should be long term in most cases... just as real estate. We had so many programs that made it to easy and allowed many with a pulse. We need the loan officer to educate the consumer.

jeff belonger

Janet,.. I also wanted to copy this part.... you said this....

While many in the mortgage industry are saying "refinances are DEAD", the Silent Majority doesn't agree.

They just don't know how to make it happen so they have remained silent, frustrated and hoping that "the world would change".

They wait for rates to drop even though that isn't THE REASON THEY NEED TO REFINANCE.

Okay? refinances are dead in many cases.... rates on a whole have been low in the last 3 years. Anything at 7% or lower, depending on the loan amount, doesn't usually make sense. You would spend $9,000 to save $81 a month? That would take about 9 years to recoup that. Again, it comes down to goals. And you said they don't know how to make it happen? Who is they? The borrower or the loan officer? I focus on purchases for many reasons.... if you are a good loan officer, you can go into your data base and help those that need it. But just a slightly lower rate, doesn't make sense, unless you are paying off debt. But how many pay off debt and then reuse their credit cards again? Again, it comes back to more education and discipline. At least in my opinion...

You talk about thinking outside the box... you really don't need to... there are only a few ways to refinance. It starts with an honest loan officer.... I still get a few clients a month, both on purchases and refinances to where they are in their 3rd month of the loan application. And in many cases, the loan officer comes back and says that they can't help now or they can't do the deal.

jeff belonger

Higher Rate/Lower Payment refinance: You are coming out of an adjustable rate mortgage. You have a 5 year I/O ARM that is ready to re-set. Although your rate is adjusting to something LOWER than you now pay, you are also shrinking into a 25 year loan, with original principal still there (since you paid interest only) AND giving up your interest only option. If you go into another ARM, and take the interest only option, and amortize over 30 years, payment could be lower.

Refinance to a higher payment: You are in an ARM that has already re-set. Payment is not that high because index is LOW. But you are at risk for payment going higher the next 25 years you have the loan. It might be better to take a higher payment without the risk of the loan adjusting every 6 months...

Take equity from house and pay down the other house: House with not much equity needs to be refinanced because adjustable is about to reset. But house cannot be refinanced, because there is not enough equity to do so. Other house has lots of equity. By shifting some of the equity to the house that needs to be refinanced, you can now proceed with refi.

These are all actual cases that I have had to handle for clients, Jeff. When I say that homeowners are not sure how to make it happen, I am referring to the fact that coming out of an adjustable rate mortgage is often quite intimidating and confusing for the average guy, and often the starting point for why they want to refi.

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