Review your refinancing opportunities

What we’re talking about here is loans over $730,000, which are those that are not bought by Fannie Mae and Freddie Mac.  Just because the loans are available doesn’t mean that everyone gets one.  You still have to go through the relatively stressful process that loan underwriting is these days and prove that you can pay the loan back (and then some, it seems).  Expect to produce documentation over and over again, expect your appraisal to come in low, expect the lender to want to see 20-40% in equity.  It’s a tedious process and potentially worth it.

These conditions are strict compared to five years ago, but the fact that more loans are being made is a good sign.  While perhaps not a loosening of credit standards to something more reasonable, it is a loosening of credit.  The reason that is significant is that it means the secondary market for mortgages is starting to show signs of life again.

To oversimplify (remember, this is a blog), there are two major “consolidators” of mortgages—(1) the government agencies that buy loans at $730K and below and (2) private consolidators that buy loans at $730K and above.  When these “consolidators” buy mortgages from lenders and securitize them, they infuse the lender with cash to make more loans.  Expand your geographical horizons for a minute to remember that there are far more loans in the country made for less than $730K than there are over that amount.  In the recovery from the “financial meltdown,” the under-$730K consolidators have had more opportunity to re-establish confidence in the buyers of these mortgage securities, so the consolidators have had an easier time loosening up money for loans at $730K and lower.

The larger-loan consolidators have lagged behind simply because there is less of a secondary market in which to sell these loans.  To see that more of these loans are being made suggests that there are more confident buyers of larger-mortgage securities, which in turn gives the larger-loan consolidators money, which in turn allows them to buy more loans from lenders, which in turn allows those lenders to lend again to someone else that needs a loan for $730K or higher.

While the days of getting a mortgage by putting a fog on a mirror are nowhere close to returning, this sign of life in the jumbo market is a good thing.  If you couldn’t refinance before, you might want to see if you should refinance now.

The following statements are not true

The mortgage business is a highly commoditized, highly competitive place.  I have no illusions about that.  I did however get lulled back into an illusion that every mortgage salesperson has the same level of advice, expertise, and service that Scott and I do.  That illusion has been blown, once again.  There’s nothing better than a respectable competitor to learn from.  There’s nothing worse than dealing with a “peer” that you’d be afraid to be seen eating lunch with.

I would never hire the person on the other end of the phone based on personality, but I’ll leave the personal out of this.  This poor sot probably has to deal with 20-50 calls like mine every day because he was well practiced, down to the verbal tics, in handling all my questions and objections.  However, I would never advise anyone to do business with him or his company because his sales tactics included the following paraphrased sentences, none of which was true:

     * You’re getting the best rate and preferred treatment because you were
        referred by your existing lender. (May grace befall upon the borrowers
        who are not preferred.)

     * You’re getting the best rate because we’re not a middleman and we go
        direct to Fannie Mae and Freddie Mac to get the best rate for you.

     * You’re getting the best rate because you qualify for special government
        programs, and we’re one of few companies that can offer these
        programs.

     * I can guarantee that we’re providing you the best rate.

     * I’ve closed over 1000 loans, and therefore I have the experience to tell
        you that this new loan is in your best decision you could make.

     * Why do you need to waste your time confirming with someone else who 
        doesn’t have experience in the business that I’m offering the best rate? 
        You’re a busy person.  Why don’t we just go ahead and wrap this up.

     * I’m a busy person. I was working on several other applications when
        you called.  I didn’t expect this call from you today.  I’m going to be
        busy tomorrow.  Can we set up a time when you’ll be around so I can be
        sure to reach you to follow up?

No sensitivity to the fact that my friend is sick.  Apparently not enough experience to notice the fact that my friend is in her upper-60s and might be receiving Social Security Income to quality.  And clearly not confident that he was offering the best deal because he was pushing for the commitment so hard it finally repulsed me.  It wasn’t even my loan, and I have pretty thick skin.

The lesson? If you have seniors in your life, make sure they get help with their financial affairs. The world moves very quickly, they often make decisions much more slowly, and they require more time to digest information and comprehend it.  Our culture wants speedy decisions, not quality ones.  The second lesson:  Don’t believe everything you hear from your own lender.

What to consider

     There was a great article in the New York Times not a month ago about this very topic (“Just Walk Away” by Roger Lowenstein).  If you’d like a copy, send me an email, and I’ll pass it along to you.  The author’s main point was this:  Big companies don’t hold onto bad assets, feel no shame about unloading them, and don’t worry about their credit ratings.  These companies practice “strategic default.”  Case-in-point, I just recently received an email from a company from which I buy products informing me that it was filing for bankruptcy.  It explains, “As numerous companies have demonstrated during this difficult economic cycle, using this type of legal process can be an effective way of achieving a fast and efficient debt restructuring with minimal disruption to the business.”

     So why should individuals act differently?  Why does the Obama administration ask homeowners to continue paying on their debt on homes in which the debt exceeds the value by 2-to-1?  Because it’s good for the banks, which are selling off their mortgage portfolio to the Fed because it’s a good business decision to unload as many bad assets as possible?  I don’t get it.

     If you decide to walk away from a piece of property and your mortgage obligation, you still have to live with yourself.  If walking away from the debt takes off years of your life in guilt and stress, it’s not worth it.  But if unloading the asset in a time in which banks are prepared to deal with it, why not take advantage of opportunity to put yourself in a better place financially?  Yes, your credit will suffer.  Temporarily. Yes, you will have reneged on a promise.  To this point, I thought the article put it brilliantly:  You did promise to pay, but the contract outlined specific penalties for non-payment.  “The borrower is not escaping the consequences; he’s suffering them.”  I also agree with the author that a flood of “strategic defaults” by homeowners might lead to more loan modifications by banks, which is what’s supposed to be happening.  It might “un-stick” the system, which would be good for all of us.  Consider walking away.  Talk to your accountant, your financial planner, your bank.  Get the facts and then decide.