Realty DOOM

Now even those with perfect credit, great income, and stable reserves or assets are seeing the results of the subprime crunch affect them. With so much uncertainty in the market today home equity lenders, who usually hold second liens on homes, are starting to make it more difficult for homeowners to refinance their first mortgages. The reason this is a problem?

When a homeowner with two loans on their home wish to refinance only their first mortgage, the new lender must ask permission from the lender holding the current second mortgage on the home to approve their “subordination” request. If the second lender does not approve the subordination then the first lender cannot continue with the refinance. Because second lien lenders have hit so many roadblocks and financial difficulties in the recent years they have become more and more hesitant to approve these subordination requests. Instead they are asking homeowners to reduce the size of their first loan or to reduce the size of their line of credit, which is usually the second loan on the property.

This has become quite the obstacle considering that many well-qualified homeowners are attempting to refinance their mortgages into better situations — either lower interest rates or longer-fixed terms. Refinancing into a secure loan is one of the best suggested methods to prevent the possibility of future foreclosure, and yet homeowners are finding it more difficult to even do that. Provided by Wall Street Journal Online

In the latest sign of how the credit crunch is hurting even borrowers with good credit, some home-equity lenders are starting to slam the door on homeowners who want to refinance their primary mortgages.

In some cases, homeowners who in the past would have been easily approved for a mortgage refinancing are finding that they can’t get their home-equity lender to give the go-ahead, which is required to complete the transaction. Others are being told by their home-equity lender that they need to reduce the size of their loan or line of credit.

Approvals from home-equity lenders used to be routine, particularly if the borrower wasn’t increasing the size of the mortgage as part of the transaction. But that’s no longer always the case — even in places where the housing market hasn’t been hit by huge price declines.

Such approvals, known in the industry as “subordinations,” mean that the home-equity lender agrees to stand in second place behind the new mortgage and allow the existing first mortgage to be replaced by another first mortgage.

Many mortgage refinancings continue to go through without a hitch. But some homeowners who want to lower their rates or lock in a fixed-rate mortgage can’t, even if refinancing would save them money and put them in a better position to repay their loans.

“For borrowers trying to improve their situation, this is a nightmare,” says Richard Redmond, a mortgage broker in Larkspur, Calif. That’s because getting a new home-equity loan to replace the old one in order to get a refinancing approved “may be impossible,” he says, as many lenders have significantly tightened their standards as housing prices have fallen.

During the housing boom, many borrowers used home-equity loans as a way to buy a home with little or no money down without having to pay for private mortgage insurance. Others turned to these loans to pay off higher-cost debt or to finance renovations and even vacations. The dollar value of home-equity loans outstanding stood at $1.1 trillion in the third quarter of 2007, according to the Federal Reserve.

The higher hurdles for borrowers come at a time when home-equity lenders are reeling from rising losses in the face of higher delinquencies and falling home prices. More than 5% of home-equity loans were at least 30 days past due in January, according to Equifax and Moody’s Economy.com, up from 4.4% in December and 3.4% a year earlier. Delinquencies on home-equity lines of credit have also risen, to 2.2% in January, from 1.9% in December and just 1.2% a year earlier.

Lenders extended an estimated $456 billion of new home-equity loans and lines of credit in 2007, down from a peak of $504 billion in 2006, according to SMR Research in Hackettstown, N.J.

In an effort to stem future losses, home-equity lenders have tightened their standards by, for example, significantly cutting back on how much of a property’s value borrowers can finance. They are also going back to some borrowers and freezing their home-equity lines of credit or reducing the maximum amount they can borrow. Charlotte, N.C.-based Bank of America Corp., for instance, began notifying some of its customers last month that it was blocking access to their home-equity lines because of falling home prices.

Cleveland-based lender National City Corp. last month stopped approving refinancing requests from borrowers who received a home-equity loan from the lender through a mortgage broker. Kristen Baird Adams, a National City spokeswoman, says the move was “consistent” with the company’s decision last summer to stop making loans through mortgage brokers.

A ‘Strategic’ Decision

“As a general rule, we are declining” requests related to such loans, says Ms. Adams. “It was a strategic business decision.” She adds that “in certain scenarios, if the borrower’s first mortgage is with another lender and they are willing and eligible to refinance [the existing mortgage] through National City Mortgage, we could subordinate the existing second mortgage.”

Some other borrowers are getting turned down by National City because of tighter lending standards, such as a reduction in the maximum percentage of a home’s value a borrower can finance, Ms. Adams says.

Dale Betterton, a financial-software developer, was among those caught short by the change in National City’s policies. Mr. Betterton bought a home in Boulder, Colo., this past summer with 5% down. When interest rates dropped last month, he decided to refinance. But National City, which holds his home-equity loan, declined to approve the deal. Mr. Betterton had “superb” credit and the new mortgage would cut his mortgage rate by more than a percentage point, making him a better credit risk, says his mortgage banker, Lou Barnes of Boulder West Financial.

“My understanding was it was pretty straightforward to refinance when rates go down, and there wouldn’t be any strange obstacles,” says Mr. Betterton, who is now considering paying off his second mortgage so he can refinance.

David Erickson, a mortgage broker in Lynnwood, Wash., says he’s had two refinancings declined by National City that “would easily have gotten approval six months ago.” In the past, he says, home-equity lenders were eager to keep the loan on their books. Now, he says, “they’d sure love to get paid off and get 100 cents on the dollar.”

In some cases, borrowers are getting a thumbs down from their lender because of a change in credit-worthiness or because of falling home prices. Others are getting squeezed by tighter lending standards.

“If there’s a material change in the borrower’s credit or the value of the home, we might be less willing” to approve a refinancing, says Richard Lieber, mortgage bank chief credit officer for IndyMac Bancorp Inc. IndyMac evaluates refinance requests “on a case-by-case basis,” he says. “Due to declines in home values, we are turning down more” of these requests now than in the past.

Other lenders are also giving refinancings more scrutiny. Michael Dunne, a loan officer in Canton, Mass., says one of his clients was unable last month to complete a refinancing that would have reduced his mortgage payments by about $250 a month because local lender South Shore Savings Bank, which held the home-equity loan, refused to give its approval.

South Shore originally held the mortgage, as well as the home-equity loan, but the mortgage was recently sold to investors, Mr. Dunne says. The borrower had good credit, he adds, wasn’t pulling out cash and had never missed a payment, but his total mortgage debt exceeded 90% of the home’s value at the time the loan was originated. The rejection “really kind of shocked me,” Mr. Dunne says, adding that the lender’s “situation was not being hurt in the least bit.”

Christopher Dunn, an executive vice president with the South Weymouth, Mass., lender, says he can’t comment on the specific situation. “I think we are all being more careful,” he says. “On the other hand, if our position isn’t being worsened and the customer is able to do something to improve their situation,” the bank is likely to give its approval.

Reducing Credit Lines

In other cases, home-equity lenders are vetting applications more closely and reducing the size of their line of credit before approving a refinancing. On one recent refinancing, Wells Fargo & Co. asked for copies of bank statements and other documentation to get a better picture of the borrower’s assets, even though it had approved the borrower for a home-equity line of credit four months earlier, says David Soleymani, a mortgage broker in Los Angeles.

Wells Fargo ultimately approved the deal, but reduced the size of the credit line to $220,000 from $250,000. The move didn’t create a hardship for the borrower because he hadn’t tapped the credit line, Mr. Soleymani says. “Historically, they would accept [the borrower’s information] at face value” and not ask for the documents, he says. “There’s a higher level of scrutiny, and there’s no longer the automatic assumption that the holder of the home-equity loan will subordinate.”

Wells Fargo evaluates refinancing requests “on a case-by-case basis,” says Kevin Moss, head of home-equity for the San Francisco-based lender, “and we consider a variety of factors such as credit experience, the combined loan-to-property value, and the ability to repay the outstanding loans.” We want to do everything we can to try to work with our customers,” he adds, “and keep their business while following responsible lending practices.”

Homeowners with home-equity loans or lines of credit may be able to refinance more easily by simply paying off their loans. With home values falling in his market, Steve Walsh, a mortgage broker in Scottsdale, Ariz., says he’s encouraging some borrowers who haven’t tapped their credit lines or owe only a small amount to close down those lines, even if they have to pay an early-termination fee, which can run about $300.