Year-End Pick-Up in Activity

The Limits of Statistics
in Valuing Homes

It's only Wednesday, and I've already fielded three calls this week from appraisers wanting "scoop" on recent, closed sales that I've handled.

A year-end pick-up in deals?

Well, that, too.

However, in each case the appraiser was working on a refinancing application.

To approve the new loan, the lender needed to establish current market value, which in turn means performing an appraisal and identifying/analyzing the Comp's -- just like they would for a sale.

The fact that appraisers need to talk to actual, live Realtors -- who can fill them in on floor plans, updates (or not), and other home features not otherwise captured in statistics -- should give anyone relying on Trulia, Zillow, etc. for home values pause.

P.S.: Time permitting, I'm happy to talk to appraisers. Often times, something I know can be the difference between a deal (or refinancing) happening -- or not.

In an environment where banks are looking for any excuse to shoot down a deal, as a plugged-in, on-the-ground expert, I'm ideally positioned to serve as a counter-balance.

Of course, a healthier, more active market benefits everyone.

Flight to Safety = Rate Drop

Market Melt-Down Creates Refinancing Opportunity

No, it's not good when already volatile markets lurch downward like they've done the last couple days.

However, astute financial observers know that such turbulence is also accompanied by a "flight to safety" -- in this case, U.S. debt.

Doesn't the U.S. have a $13 trillion (and counting) deficit, and many more trillions in unfunded obligations?

Doesn't really matter, at least for the moment; in the land of the financial blind -- that would be the Eurozone at the moment -- the one-eyed man is King.

What does that mean for the the housing market?

A weaker economy -- if that's indeed what's ahead -- isn't great news.

However, the silver lining is that anyone who's on the cusp of refinancing can do so at rates that are temporarily "on sale."

Refinancing "Ostriches": Pain Avoidance?

Top 4 Obstacles

Water, water everywhere, but nary a drop to drink.

--Samuel Taylor Coleridge, "The Rime of the Ancient Mariner"

Substitute "money" for "water" and you have a good sum-up of today's lending environment.

With mortgage rates at record lows -- around 4.75% for a 30 year mortgage -- you'd figure that anyone paying, oh, say, 6% or higher would refinance.

But that's not what I'm hearing from the lenders I talk to.

Anecdotally, here are the top 4 reasons -- at least according to the lenders -- why many refinancing candidates . . . don't. (To get the real scoop, I suppose you'd have to survey the non-refinancers.)

One. Paperwork/Inertia.

Refinancing a mortgage requires pretty much the same rigamarole as getting a purchase-money mortgage: applications, W-2's, income tax returns, etc. Some people never get around to it -- or peter out halfway through.

Two. Pain avoidance.

Of course, the big piece in any refinancing is the appraisal. Which means facing how much your home may have dropped in value since you purchased it.

Just like no one wanted to open their monthly brokerage statements a year ago, lots of homeowners now apparently don't want to confront current housing prices.

Which leads to . . .

Three. Sense of Futility.

In fact, a tighter lending environment makes it objectively harder to refinance ("Interest Rates Are Low, but Banks Balk at Refinancing" -- The New York Times; 12/12/09).

Who's shut out?

Homeowners who put little down and whose home values have been whacked -- and therefore lack the collateral banks require (see appraisal, per above); anyone who's lost their job; and anyone whose credit scores have been beaten up during the recession (south of mid-600's is a big problem).

Four. Fees.

There are rational reasons for not refinancing, too.

If you're going to move in a few years, you probably won't recoup the 3% or so it can cost to refinance.

Option-ARM with 12 Zeroes?

The Mother of All Re-Financing Risks?

Taking on new debt is an action that has implications for the true cost of the U.S. government's financial rescue initiatives. This cost may have significant refinancing risk."

--Special Inspector General Neil Barofsky

Let's see . . . one of the main story lines of the housing bubble involves millions of borrowers scooping up easy, short-term money -- from creditors more than happy to dispense it -- based on the belief that they could easily refinance on favorable terms.

Unh-unh.

As we all now know too well, housing stopped appreciating, the credit spigot got turned off . . . and millions of homeowners got stuck with spiking mortgage payments.

Now, to mitigate the fallout from the housing bust, the U.S. government is issuing trillions in (for now) dirt-cheap, short-term debt.

Thank you, Alan Greenspan (it was Greenspan who said the Fed's job was to mitigate the fallout from burst bubbles, not to prevent them).

So what happens if all that debt can't be rolled over on easy terms?

Unlike individual households, the government can always print money to repay its obligations.

But creditors who are wise to that: a) refuse to lend; b) require rates significantly higher than zero (what the Fed is able to pay now); or c) both.

Cause(s) of Interest Rate Volatility

Interest Rate Level as Regulator Valve

Anyone in the market for a new mortgage -- or trying to refinance an existing one -- can attest to how volatile interest rates are today.

Certainly, one key ingredient is the unprecedented uncertainty in the credit markets. However, another, more recent factor is understaffed lenders.

According to local mortgage broker Alex Stenback, lenders have cut back staff to the point that they simply can't process high volumes of mortgage applications (at least not quickly).

When they're overwhelmed, they turn off the application spigot by raising rates; when they're caught up or want to attract more business, they open the spigot back up by lowering rates.

That's just one more reason for consumers to watch rates more closely than ever. Practically, that means choosing a with-it lender or mortgage broker who'll do that for you . . .

$3,000 ATM Fee?

Cheap Money Elusive for Many

While rates are falling, borrowers face higher costs every step of the way, from rising fees for mortgage insurance to added costs that drive up the mortgage rate. At the same time, lenders have become more cautious about who they will lend to, as more people lose their jobs, watch their incomes decline and fall behind on their bills.

--"Costs and Tighter Rules Thwart Refinancings"; The New York Times (1/24/09)

The big drop in interest rates -- from over 6% to under 5% -- isn't stimulating the housing market as much as hoped because many would-be borrowers and refinancers don't qualify. Depending on the individual housing market, as many as two-thirds of applicants are denied (in the Twin Cities, the number I've heard is 50%).

Many of the remainder still may not get the best, advertised rates, due to something called "risk-based pricing." Just as some people pay 7% on their credit cards and others pay 22%, mortgage rates now vary considerably depending on your risk profile.

To add insult to injury, lenders are now imposing additional fees on weaker credit risks to compensate for their projected higher risk of default. (Such an approach may make sense now, but it smacks of "gotcha" to millions of borrowers who faced no such hurdles when they signed up for their original loans. On the contrary, lenders pitched low initial "teaser" rates, "option-ARM's" and other sugar-coated loan features.)

The net result is a huge winnowing-out factor for those trying to lower their payments and/or switch out of risky mortgages.

Oh, and forget about "cash-out refinancing" -- using your house literally as an ATM. Even if you have enough equity to do it, the cost is likely to be prohibitive: anywhere from $500 to $3,000 to access $100,000 of your equity.

Money's Fungible . . Borrowers Aren't

One Size, er, Rate Doesn't Fit All

One of the more noteworthy features of today's mortgage market, besides greater volatility and generally declining rates, is the wide range in quoted interest rates.

For sterling credit risks -- credit scores in the high seven hundred's or above, plenty of existing home equity (or a fat down payment, if buying new), stable jobs, etc. -- the gates of "(re)financing heaven" are very much open. If that's you, you can walk through and borrow at 30 year rates well below 5%.

However, if you don't meet those criteria -- and anywhere from half to two-thirds of all prospective borrowers/re-financers now don't -- Fuhgettaboutit.

It's also the case that people applying for jumbo loans are being quoted substantially higher rates than for so-called conforming loans (generally, under $417,000), because the latter can still be re-sold on the secondary market, while the former can't.

What that means for consumers is that there isn't one prevailing interest rate anymore -- they're dozens, depending on your profile and borrowing needs.

Amongst other things, that makes using the Internet and shopping for rates a little more daunting now. It also makes good lending relationships more valuable.

That's because, while money may be a commodity ("fungible") . . . prospective borrowers are unique.

Refinancing Motives

Refinance to Lower Payments --
or Avoid Higher Ones

With long-term mortgage rates flirting with 5% again, many homeowners should revisit whether it makes sense to refinance.

Refinancing (assuming you can) is appropriate in two situations: 1) you're able to substantially lower your monthly payments; or 2) if you don't refinance, you face the prospect of substantially higher monthly payments. It's also relevant whether you're planning on staying put or not: there's no point in paying to upgrade a mortgage that you're not going to keep.

Ultimately, the decision to refinance is just a cost-benefit analysis.

The cost is the 2.5%-3% or so you can expect to pay for the new loan (unfortunately, about the same cost as the original, purchase money mortgage).

The benefit is the reduced monthly payment.

To use concrete numbers, if you currently owe $250k on a 30 year, 6.25% mortgage, you could reduce your monthly payments about $200 by refinancing at 5%. If the cost to refinance was $6,500, you'd recoup the fees in a little less than 3 years. Over the life of the loan, your savings would total an impressive $72k! (You'd have to partially offset that by what you'd have if you'd instead invested $6,500 for 30 years).

My mastery of hurdle rates, internal rates of return, etc. was never that good -- and is nonexistent now -- but intuitively that seems like an attractive proposition.

Even if you can't improve your situation, you may want to refinance to prevent it from getting worse. That's the case if your current mortgage is set to adjust to a substantially higher rate soon, is non-amortizing (interest only), or negatively amortizing (the amount you owe actually increases).

In any case, to qualify for refinancing at all, your credit scores must be decent (mid-600's or better), and you must have sufficient equity to serve as collateral. Unfortunately, that disqualifies many homeowners who bought in the last couple years with little or nothing down, and have seen their homes drop in value.

If you're a bona fide refinancing candidate, here are three tips: 1) be sure to ask for the federally-mandated disclosures (the Truth-in-Lending, or "TIL," and the Good Faith Estimate; 2) inquire about a re-lock option, which lets you capture a lower rate if they drop while your application is pending; and 3) shop around.

Money is fungible, and quoted fees vary. Think of it this way: before you spent $6,500 on a used car, new roof, etc., you'd expect to do some due diligence, wouldn't you?