On the eve of the closing for my refinancing, I notice this from the W$J:
Interest rates on fixed-rate mortgage loans for prime borrowers have fallen to below 5%, the lowest level since the 1950s, triggering a wave of mortgage-loan inquiries from borrowers eager to refinance. But lenders and mortgage companies say that as many as half of the people who want to refinance can't meet the credit hurdles and won't get approved.
My friend and mortgage broker told me that he has been swamped with inquiries, and he seemed surprisingly grateful to get our credit scores (both around 820) and the appraisal (down only about 3% from our purchase price less than two years ago). Now I understand why:
Only about a third of U.S. mortgage debt outstanding is likely to qualify for refinancing, said Doug Duncan, chief economist of Fannie Mae. Nearly 70% of borrowers don't make the cut, he said, most often because their credit isn't good enough or they don't have sufficient home equity. A significant number of homeowners owe more than the current value of their homes, a situation sometimes known as being "under water." Others can't profitably refinance, often because they hold jumbo mortgages, those above the $625,000 limit for loans that can be bought or guaranteed by Fannie Mae or Freddie Mac in the highest-cost areas.
I reiterate that I am not an expert in mortgages, but I suspect a lot of people are frustrated by the incongruity of being unable to lower their monthly mortgage payments on account of the fact that they have bad credit. Wouldn't their creditworthiness improve if they got the new loan?
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1. Posted by Elizabeth Brown on January 15, 2009 @ 15:06 | Permalink
Maybe not for most people. It appears that more than half (58%) of the people who got modified loans during the first quarter of 2008 defaulted on them within 6 months, according to John Dugan, Comptroller of the Currency. See http://www.occ.treas.gov/ftp/release/printview/2008-142.htm
A US News articled noted that several factors contribute to these redefaults: (1) extremely overextended borrowers who can't meet their obligations even with generous loan modifications and which may be due to the amounts that they owe on credit cards, student loans or other debt, (2) underwater property values that give borrowers an incentive to walk away from their properties rather than pay, (3) modifications have created a moral hazard problem in which borrowers expect additional modifications if they redefault, (4) some loans might not have been modified aggressively enough to make them affordable, and (5) rising unemployment might be preventing some borrowers from repaying. As a result of these factors, modifying the mortgage terms might not be enough for most people to improve their creditworthiness.
The reality is that this financial crisis is about more than just the housing bubble. The bursting of that bubble might have been the tipping point, but the amount of debt that Americans owe has climbed rapidly over the past 25 years. According to "Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors" by Robert M. Lawless, Angela K. Littwin, Katherine M. Porter, John A. E. Pottow, Deborah K. Thorne, and Elizabeth Warren, by 2007, the median household owed nearly 15 months of income to unsecured creditors, for an unsecured debt-to-income ratio of 1.22. By way of contrast,in 1981, the median household in bankruptcy owed just under six months of income in credit cards, medical debts, and other unsecured credit, for an unsecured debt-to-income ratio of 0.46. The ratio of unsecured debt to income was two and a half times larger in 2007 than it was in 1981.
As unemployment grows and individual Americans increasely default on other forms of debt, we are likely to see other securitized debt obligations which will send additional negative ripples through the financial sector. In an article in Forbes today, it was reported that JPMorgan (one of the banks that was profitable last quarter) expects that credit card losses could rise to 7% to 8% of its portfolio by the end of 2009.
Unfortunately, the reality is that Americans allowed themselves to become excessively leveraged and it will be an extremely painful process to get back to a point where most individuals are at manageable debt-to-income levels.
2. Posted by church mortgage on February 8, 2011 @ 8:35 | Permalink
Unfortunately the credit has to meet requirements before the new loan happens. Credit requirements have gotten much more stringent.
3. Posted by pension funds on June 20, 2011 @ 22:59 | Permalink
It WAS A VERY INFORMATIVE AND INTERESTING BLOG. THANKS FOR SHARING IT.
4. Posted by car finance on June 22, 2011 @ 23:37 | Permalink
The best car finance scheme is the one that provides the lowest rate of interest and extended loan tenure.
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