I woke up this morning with questions about current loan requirements for a refinance. No I wasn’t having a nightmare. I am just sort of living one faced by many Americans who have been denied the money being printed by Ben Bernanke and the private money pressed the Federal Reserve. On several occasion over the last interest rate cycles we have thought about refinancing both our house and our one piece of income property. While not purporting to be a real estate expert (I’m not) we have through careful budgeting have been able to start the purchase our home and invest in one single family residence (a 3 bedroom house) in the suburbs of the Los Angeles area.
We raised our family in the one now used as an investment property for 15 or 16 years and when the opportunity of doing elder care was needed we decided to look for a larger house and secured a second loan credit line because we wanted to purchase at house on our time table and not sell our principle residence first and then start looking. We were confident we could sell our house and cover all of the costs associated with the move. We researched and looked at over a hundred houses walking many many streets in all of the beach cities and Torrance (we wanted a great high school). While we loved Manhattan Beach and Hermosa, we decidedly landed in quiet central Redondo Beach location 10 years ago in an amazing house with wonderful neighbors well before the last surge in housing values. Our astute mortgage broker looked at our numbers during the financing and stated “you know you could rent out your house and cover both the first and second loan payments and have enough to handle the expenses of investment property!
” Wow we thought here is our chance at the brass ring. We could start an investment for our eventual retirement.” Taking on this second job has been both a blessing and a lot of hard work and added expense but overall it has been rewarding yet terrifying. Properly capitalizing the property for the evolving rent increases and decreases is a learning experience. We have been able to steadily make improvements to the property with a new roof a remodeled bathroom, forced air heating system, painting the exterior and adding some new windows. We have weathered new tenants and rent fluctuations each time wondering, “Do we have it priced right?”
Interest rates have declined considerably and we have taken advantage by refinancing and lowering our debt on our primary residence several times. We were able to secure a credit line on our income property to be able to do capital improvements on both our principle residence and the income property. Interest rates are now at a historic low we are still unable to take advantage of it with our investment property.
When the housing bubble burst our lender quickly froze the credit line was converted into an interest only second loan based on a computer matrix model. I was given an opportunity to appeal if I paid for an appraisal. I thought that stinks why do I have to pay for an appraisal and the bank doesn’t but I conceded those who have the gold do make the rules which I did read and sign and have a copy of. Since then I have tried to refinance when rates declined but was unable to do to how the banks look at my loan. While the credit line which no longer is a credit line it is still looked on as a cash out loan? So the lenders are restricting my ratio to under 60 to 70% of what they will refinance. Now to this plain spoken American it doesn’t make allot of sense but hey once again them’s the rules.
So Interest rate are now at a historic low and being unable to refinance both loans due to restrictions, I thought “well if I can’t refinance the entire amount how about just the first and get the holder of the second bank to subordinate to a new loan at a better rate and for only a $250.00 nonrefundable mind you they will. Now I get the property refinanced for the third time and guess what? Once again the appraisal comes in even lower due to the short sales and foreclosures in the neighborhood. We have spent over a thousand dollars and hours and hours of compiling papers and copying only to be stalled out again and again.
Now appears the conundrum that leads us into a partial cause of this mess. People purchased property on an adjustable rate that included a very low rate which lenders used to make loans to people priced out normally from home ownership. Buying your first house is a pretty heady achievement as you step forward in entrepreneurship and are no longer paying rent but paying yourself a part of the payment in the hopes of one day owning your own house. Then the reality sets in. That water heater blows up there is no landlord to call. The lawn needs to be mowed the maintenance fees can add up and unless you become familiar with home depot and are willing to work and learn you must pay someone else to work for you. Then the loan adjustments start coming down the road. After putting in a new roof and replacing the sewer line your cushion is pretty much eaten up. The wife or husband gets laid off or has to take a wage concession. Children magically appear. After receiving several months of unemployment benefits a job is secured at half of what you once made. That house payment that once was 33 % in now a budget stretching 50 % or 75 % of your expendable income. You eat rice and beans. You see all of the advertising for the lowest interest rate in years and they are on a fixed loan. Here is your chance to get some relief
You apply for a loan with the lender that holds your current loan. You get an appraisal and they say well sorry your house will not qualify. They look at you income and even though you have never missed a payment and your credit is over 700 they decline to refinance. Now it gets worse you put your house up for sale and are offered a short sale 50,000 less than you need to pay off the loans. The bank hems and haws and approves the new loan giving your house over to a new owner who has more income. Then you find out the new owners are just filing for bankruptcy and are in foreclosure themselves. They were smart enough (but unethical) they are using the money they should have been paying their loan off as most of their down payment for the new loan and left have their old house and the loss with the bank. Was it fraud? Yep! Was it legal in some cases yes!
What could be an answer? After months of quantitative easing there is billions of capital sitting in the banking system that they cannot and will not lend to you and me because out house Has declined in value due to the actions of those who were unable or unwilling to make the sacrifices to meet their obligations. Also the rules that banks are issued for the criteria to sell the loans on the secondary market must be followed or they would have their ability to lend restricted to only the assets they currently have on the books and people would be denied the investment in bonds created through the bundling of mortgages.
I know this is a very simplistic rendition of how loans work. Then this morning I thought what if a bank or lending institution who currently hold loans were not allowed to use the appraisal to deny a refinance to those who were current on their payments had a stellar credit history 700+ and had the ability to pay the new loan. My thinking if you haven’t missed a payment yet for 2 years would suffice. The bank would get to make their points so they could care less. The loans could be packaged and sold to those who wanted to invest in funding loans to people who pay their bills no matter what. Thousands of people who are underwater but are still making their payment would save hundreds if not thousands annually in the housing costs. This capital could be spent on say medical bills or education or even a newer car or a future investment. When a person commits to making a payment for thirty or more years shouldn’t the banks make a similar commitment? If the cost of money drops should not the money be freed to spread around to those willing to take the risks of home ownership and handling income property?
A second thought is if the bank is willing to take a lower new mortgage through a short sale. What happens to the homeowners who keep plugging away making their payments next door. They then get denied a refinance because of the questionable but legal lending practices established by the federal government.
Could there be a private answer to Fannie Mae and Freddy mac? It is difficult to compete with a company with unlimited resources who make up the rules and change them as they go along.
If I loaned you a dollar plus a nickel for points I then secured a note against the skateboard I sold you to be paid back the dollar plus a quarter a year in interest. If you didn’t pay me I would get my skateboard back. If you took the wheels off I could make a further claim against you for depriving me of what is rightfully mine. You could use the skateboard to lend to others for a quarter and over time pay me back by collecting over time enough capital to pay me back. I don’t care I am owed a dollar plus interest for the life of the loan secured by a note. If the skateboard is now only worth 50 cents you could offer to renegotiate our terms and I would say you owe me a dollar plus a nickel. If you borrowed from another friend who is willing to lend me a dollar and a penny I would give you your dollar back and own the board. If I was selling another board to another person and were willing to sell it for a 50 cents and a penny a month, you would not be allowed to refuse to renegotiate my interest payments down to a penny a year since I am paying back the dollar which I owed you on the original value of the board. While I would like the higher interest if I am willing to make less with someone else I would have to give you the same rate. Banks change the interest they pay out all the time. You still get your dollar back plus interest. But what if you can sell the board for 2 dollars now and get 50 cents in interest. You need to make acquire another board and do that. I save money you can still make money and the economy grows.
This one concept could reduce the housing inventory rapidly and stabilize prices almost immediately at their current levels. Banks would be able to lend and make money further stimulating the economy. Capital would be freed to be invested in rental housing and new housing starts.
Yes there are many scenarios to contradict my theorem I look forward to resolving the freeing up of the capital for new business and the reduction of everyone’s debt!
The way to wealth and prosperity is to fear God. It is the beginning of wisdom. Live beneath your means and invest the savings in the kingdom by using you gifts and abilities through hard work so that you can bless others. Steal no more but work hard to give God the glory