Refinance without an Appraisal

Last week my column focused on short sales — and my worry that one short sale will lead to the next (the domino effect). However, I was encouraged by the news I heard at my office meeting. Claudia Gravelle from Diversied Mortgage Group explained that help for underwater loans may be on the way.

So many homeowners have tried to re-finance these past few years and have been unable to, often because they no longer qualify (income has changed due to a lost job, etc), but some because the home itself does not appraise to the loan amount plus 20%.

Imagine if you bought your home for $700,000, but now it’s worth $500,000. Your loan is $560,000 (80% of the original purchase price), and maybe your interest rate is 6.5% (from 2001 to 2007, the rate ranged from 6% to 7%).

Interest rates are great now — you want to re-fi to take advantage of rates less than 4%. But you can’t qualify for a re-fi for the simple reason that your house does not appraise.

The proposed plan — to be implemented in March of 2012 — will eliminate the appraisal as part of the process. The homeowner will need to qualify for the loan in every other way: credit score, income, etc. — but the value of the home will no longer be a factor.

There are so many people short-selling their homes that would rather stay in their houses. So if this could help those people, I will be delighted.

However, I worry that this limited program can only help a very small percentage of people.  First of all, there’s the fine print to consider:

• The loan must have been originated prior to May 31, 2009
• The mortgage must be current. There cannot be any late payments for the past six months and only one 30-day delinquency is allowed within the previous 7-12 months.
• A minimum credit score of 620 is required.
• A maximum debt to income ratio of 45% is required.
• A loan term of 30 years is required.
• The maximum loan amount is currently capped at $625,500.

Also, the loan must be owned or guaranteed by either Freddie Mac or Fannie Mae. To find out if your loan is a Freddie or Fannie loan, check these sites:

• www.freddiemac.com/mymortgage
• www.fanniemae.com/loanlookup/

Hopefully there are people that can utilize this new program, but as I consider the fine print, I wonder. No late payments? So many people were told by their bank, “we’ll talk to you about a short sale (or loan modification) once you are behind in your payments.” They were encouraged to default on their loans. 

A quick search on Google leads me to many columns advising “once you are delinquent in your payments, the banks will bend over backwards to work with you.” Whether that’s true or not, it’s been the story believed by many homeowners for several years now.

Which means that the fine print on the “coming soon” appraisal-free refinance will eliminate many potentially interested homeowners.

Beyond the fine print, consider the reality: who is going to fund the refinance? Let’s say your loan is with Bank of America. You owe $560,000; the house Is now worth $500,000. You haven’t missed a payment, your credit is immaculate, you bought the house in 2005, and your debt ratio is fine.  In other words the fine print is no problem.

You apply at Wells Fargo for a re-fi. It seems very risky for them to take on this loan of $560,000 backed by a home valued at $500,000.

What about Bank of America? That’s where your loan is now — why not give them the business? Sure, but they already have the loan, and you are paying a higher interest rate. You’ve never missed a payment. Where is their motivation?

I would hope that BofA would want to do the re-fi because it’s the right thing to do. But it’s not an obvious business decision for either BofA or Wells Fargo (in my imaginary scenario).

The "coming soon" program is a step in the right direction. It's not enough by itself, but let's hope it's first of many ideas that will help stop the downward spiral of the domino effect that short sales are having on our market.