TheMReport — News and strategies for the evolving mortgage marketplace.
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FEATURE Capital Group, was a home- owner didn't refinance unless the rate difference was more than 1 percent, it saved money, and there were no fees added to increase the loan amount. And the reasons for refinancing were also different. In the 1950s and 1960s, homeowners refi- nanced to gussy up their house, pay for college, or adjust to a life-changing event, like death or divorce. Certainly some home- owners today are refinancing for the same reasons. But many of today's refinancers clearly aren't following the old rule of thumb. Refinancing today is mainly about reducing the monthly in- stallment or the number of years. "Now we have people who refinance if it benefits them for a quarter of a point," Shulman says. "Today borrowers with good jobs and credit are refi- nancing as part of a broader defensive position. They fear the job they have today might be gone in six months and treat reduced leverage as essential toward long-term security." And that's another important Consequently, self-employed people with high credit scores, a fat bank account, and 20 percent equity in their homes are being rejected by lenders and banks. "It's a ridiculous situation, but it's banks and lenders developed a system of mortgage loan qualifica- tions designed to make it easier for the self-employed. One of the new requirements was stated income, which allowed self-em- ployed people to simply declare their income. The bank or lender didn't check the stated income. In- stead they contacted the source or sources of the income, along with the person's financial assets and credit score. Using stated income worked well until it was abused during the no-document crisis. People used the stated income regulation to buy houses they could ill afford. The government cracked down on the practice and eliminated stated income. "We're back to where we Guttentag says 15 years ago, difference. Today's refinancers are savvier than their predecessors. Years back, most homeowners weren't attuned to fluctuations in interest rates. Most people relied on their loan officer at the bank or mortgage company to inform them that they could save money by refinancing. If not, the op- portunity was lost. Not so today. Thanks to the Internet, the media, and work- shops, people are well schooled on the ins and outs of the mort- gage process. Tracking interest rates is as easy as turning on your computer. Plus, mortgage rates are news. And mortgage rates that have been steadily de- clining over the past five years are big news. "It's incredible how educated consumers are," says Ciardelli, whose company is closing 3,000 loans a month, 55 percent of which are refinances. "We're finding that the minute there 34 | THE M REPORT are small rate changes, we have customers calling us up asking if it makes sense to refinance. They are just much more educated on the process as far as the com- bination between rate and fees, points, and things of that sort." Moreover, back in the 1990s when Ciardelli started Guarantee Rate, consumers didn't know much about prices, fees, or dif- ferent products. Not so today. Clients not only know the dif- ference between an ARM and a 30-year fixed rate, but they also understand the advantages of each and which is best for them. "Now they are very sure what Replotting the American Dream T exactly it is they want," he says. "They know what documentation they need in order to qualify for a loan. It's incredible how educated the customers are today." the current low interest rates is helping some homeowners stay afloat. The deflated rates not only put extra dollars in a homeowner's pocket, but they also reduce the likelihood that an owner will walk away from his or her home and mortgage. But for the self-employed, refi- nancing a mortgage is difficult, if not impossible. The new underwriting regulations, says Gettentag, require self-employed workers to provide income docu- mentation for the two previous years. Many self-employed peo- ple can't produce those records. he numbers aren't available, but clearly refinancing at were 20 years ago when we had unreasonable requirements that knocked a lot of people out of the market," he says. "So self-employed people can't take advantage of today's lower rates to refinance." Also missing out on the lower rates are people who haven't fallen behind on their payments but don't qualify for traditional refinancing because the value of their home is less than their outstanding mortgage. But some of those people may be able to refinance using modi- fication programs such as the government's Home Affordable Refinance Program (HARP). HARP's purpose is to help " Guttentag says. a reflection of the excessive reaction to the abuses that went on during the crisis years, homeowners with houses un- derwater refinance to a mortgage with a lower, more affordable rate. Working together, the government and some of the nation's largest banks find those homeowners a mortgage with a lower interest rate to reduce monthly payments.