Rate record; reduced income

Thursday, March 26
Posted 4 p.m. EDT

VACATION: My son and I are doing the opposite of what everyone else does on spring break: We're leaving Florida and braving the wind and cold of New York City for about a week. High temperatures in the 50s feel frigid to us.

If he has time, my colleague Chris Kissell will post here in my absence.

I'll be back April 6 or possibly April 3.

RATES: The benchmark mortgage rate has fallen to a low last seen in the 1950s. In Bankrate's weekly survey, the 30-year fixed fell to 5.19 percent. That's a record low in the 24-year history of Bankrate's survey. I explain in the mortgage analysis that the rates for FHA-insured mortgages averaged 5.15 percent in December 1956. Mortgages were a different animal in the days when Elvis had a hit with "Love Me Tender," so today's rates aren't comparable to what they were 53 years ago.

I worry that borrowers are holding out for rates to go even lower. I don't think that's a good idea. Yes, it's possible that rates will fall further -- but don't count on it.

I suppose it's sorta OK to try to time the mortgage market if you're going to refinance. But don't hold off on buying a house because you believe rates will be a lot lower in May or June. Don't let the rate tail wag the house-buying dog.

Here's one reason I think rates won't fall: There are more potential borrowers than lenders can serve.

In the last two years, about half of mortgage brokers have gone out of business, and banks have laid off thousands of employees. "All of those cutbacks have resulted in relatively skeleton staffs to now handle this enormous increase in business," says Barry Habib, CEO of Mortgage Market Guide.


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You can see where this is going.

"The mortgage industry is based, like any other industry, on supply and demand," Habib says, explaining that "when you're working at 101 percent of capacity and can't take any more transactions on, what's the only way you slow down the spigot? You raise prices." Or, in the case of mortgage lenders, raise rates.

It's not only a staffing issue. Big, money-center banks are squeezing out mortgage brokers and nondepository mortgage banks by limiting the little guys' access to money to lend. The big guys are seizing control of the industry and achieving pricing power. This little-noticed revolution in the mortgage industry isn't getting much attention outside the trade press, and I'll explain what's going on in the coming weeks.

SEEING RED: You've got to read Woody Allen's humor piece, "Tails of Manhattan," in the latest New Yorker. It's the funniest thing I've read in The New Yorker in a long time.

Allen's instant classic of comedy doesn't have anything to do with real estate and mortgages. But it does have something to do with the Wall Street rogues who got us into this financial mess.

BAD LUCK: Maria writes:

If your loan is NOT OWNED by Freddie Mac or Fannie Mae, what should you do in order to take advantage of the lower rates? We have lost $80,000 equity in the last 18 months so we no longer have the 20 percent equity. In order to refi the bank is requiring us to now pay PMI insurance. Do you think other lenders are going to offer some sort of a deal for those of us who are in this situation? We have excellent credit, no missed payments and are your "Average Joe." Recommendations?

A lot of people are in this situation, and they are stuck. Maybe there's a more gentle way to break that news, but there it is.

On loans that are not owned by Fannie or Freddie, lenders will require mortgage insurance on a refinance with less than 20 percent equity.

If Maria wants to refi to get a lower rate, she will have to pay for mortgage insurance -- and the monthly premium might nullify the advantage of paying a lower rate. Jumbo borrowers are suffering from this limitation, too.

Unfair? Yes. Has someone come up with a solution? Not that I've heard of.

I wish I had something encouraging to say.


Due to a severe drop in income, we are considering refinancing to a 30 year fixed mortgage. We currently have 13 years left on a 20 year fixed at 5.5 percent. We've always been current on our bi-weekly payments but could certainly use some breathing room the 30 year mortgage could provide us. Our goal is to refinance in a few years hopefully to a 10 year. Even in today's market, we have about $176,000 in equity. Your thoughts on going to a 30 year mortgage would be appreciated.

First, request a modification. Call the lender's loss-mitigation department and ask to have a modification to extend the term to 30 or even 40 years. Explain the drop in income. Be ready to document the pay cut. Have paperwork at hand (tax returns, bank statements) to show that you told the truth about your income when you got the loan seven years ago, and that the income has gone down.

Will that work? Maybe, maybe not. But it's the cheapest option, by far, because there are no closing costs. Be persistent. If the loss-mit rep won't help, ask to be escalated to a supervisor. Use that word. "Will you please escalate this call to your supervisor?" No luck? Try calling the HOPE Now hot line, at (888) 995-4673.

Many servicers are complete idiots who won't help you until you're 30 or 60 or 90 days past due. But you don't want to fall behind on the loan payments if you can help it. So if the servicer refuses to aid you until you're delinquent, I suppose your next option is to refinance.

This is all assuming that extending the term will provide enough breathing room.


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