Home refinance hopes dashed by low appraisals

Feb 1, 2008

Local mortgage lenders are seeing a surge in refinance applications as homeowners attempt to escape toxic adjustable rate mortgages -- but a new hurdle has emerged: appraisals.

Some borrowers have been unable to secure new financing because the appraisals on their recently purchased homes have been just at or below their original purchase prices.

Those same borrowers, lenders and analysts said, have little equity in their homes, and with little price appreciation, cannot refinance without additional money.

Most of the refinance applications, lenders said, are from borrowers desperate to get out of exotic adjustable rate mortgages (ARMs) into traditional fixed rate loans.

The surge in recent refinance applications has been dramatic, spurred in part by the Federal Reserve System's Jan. 22 emergency interest rate cut of 0.75 percent.

Mortgage rates and the Fed's interest rate aren't directly tied, but home loan rates dipped dramatically after the cut was announced. The Fed further cut rates on Jan. 30 another half percentage point to 3 percent.

As of Jan. 30, the interest rate on a 30-year, fixed-rate mortgage in Georgia was slightly more than 5.4 percent. Last summer, that figure peaked at nearly 6.4 percent.

That interest rate gap on a $200,000 loan, for example, saves a homeowner $122 in payments per month on a 30-year fixed mortgage.

"It was a roller coaster for two days with rates [following the Federal Reserve cut], but we're still seeing a lot of activity," said Rick Floyd, Opteum Mortgage executive vice president and Mortgage Bankers Association of Georgia president.

Floyd said calls for refinance applications this month have increased 20 percent over December.

Other local lenders had similar gains.

Greg Janicki, president of First Horizon Home Loans, said his company closed $1 billion the week of Jan. 21 in new applications across the Southeast. By comparison, Janicki said First Horizon completed $13 billion in applications throughout all of 2007.

Steve Beecham, president of Alpharetta-based Home Town Mortgage, said refinance applications and call volume to his firm tripled, "and it hasn't let up yet."

Beecham said his average refinance applicant wants to rework $200,000 to $300,000 of mortgage debt. Mortgage interest rates were so volatile, some borrowers had their loan rates change three times throughout the day on the day after the Fed initially cut rates.

"People want to get out of these ARMs if they can," Janicki said. "I don't see it as any kind of panic, but if they can get out, they're definitely doing it."

Nationally, the refinance applications index spiked 22 percent to 5,103.6 from Jan. 14 to Jan. 21, according to the Mortgage Bankers Association's Jan. 30 weekly applications survey.

The study broadly measures mortgage industry activity per week.

Refinances now account for 73 percent of the industry's total loan applications, the survey stated, and adjustable rate mortgages account for less than 10 percent of the total application market.

Loan applications that are filed now typically close within a month.

But, according to mortgage lenders, many of those borrowers who have most needed a refinance -- ones with adjustable rate mortgages that have reset to much higher monthly payments than the introductory rate and little paid up front -- are the ones least likely to get it.

"If people have cash for additional down payments and have a high enough credit score, we can work with them [to refinance]," said Beecham. "But a lot of the people we're seeing just can't."

"If people have cash for additional down payments and have a high enough credit score, we can work with them [to refinance]," said Beecham. "But a lot of the people we're seeing just can't."

The phenomenon isn't restricted to single homes throughout the city.

Eugene James, Atlanta director for research firm Metrostudy Inc., said appraisers and lenders have reported similar troubles for condominium owners seeking refinancing.

And the appraisal changes don't have to be dramatic, lenders said, to effectively bar homeowners from refinancing.

"The easy answer is homeowners have to put more money down as part of the refinance," James said. "But so many have so little to put down its impossible."

Lenders said in some cases, they're now working informally with appraisers to get a sense of the home's market value in advance of a formal refinance application by a homeowner looking for a new mortgage.

"We don't want to waste people's money with application fees right now by pulling their credit if we know they can't refinance because of the appraisal," Floyd said.

Appraisal woes

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