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Banks can’t say no to refis? Huh?

By Polyana da Costa ·
Thursday, February 2, 2012
Posted: 3 pm ET

Banks can't say no to borrowers who want to refinance their mortgages.

In short, that's what Shaun Donovan, secretary of the Department of Housing and Urban Development, said when asked by a reporter if he believed lenders were going to embrace the Federal Housing Administration refinance plan that President Barack Obama proposed Wednesday. The program would allow underwater borrowers to refinance privately owned mortgages into FHA-insured loans.

"The bank will have no ability to say no to homeowners. There is no way they could stop that loan from being refinanced," because in essence the homeowner is paying off the loan through the refinance, Donovan said during a press briefing Wednesday.

Duh! We know that.

But the question I have and I believe what the reporter at the press conference really asked Donovan was: What makes you think that lenders will refinance underwater loans just because the FHA will insure them?

The refi plan Obama proposed makes total sense -- in theory.

But I'm not sure it will work well in practice. Why? Take FHA loans as an example. The Federal Housing Administration allows lenders to give FHA-insured loans to borrowers who have minimum credit scores of 580.  However, most lenders have their own internal rules that require a minimum score of 620.  In theory, 580 is the minimum score. In practice, it's 620.

Not convinced? OK, take the previous version of HARP as another example. The Home Affordable Refinance Program allowed underwater borrowers to refinance their mortgages if they didn't owe more than 125 percent of the home's value. Still, most banks had an internal rule that set a 105 percent threshold and refused to lend up to 125 percent. HARP was revamped and that cap was removed to allow homeowners with Fannie and Freddie loans to refinance, regardless of how deeply underwater they are. It remains to be seen whether lenders will embrace the new HARP.

Lenders are not going to embrace the idea of refinancing underwater loans unless you give them a compelling incentive or simply force them to do it. FHA's willingness to insure these loans isn't a compelling incentive. Why? Because lenders don't have to take undue risks in order to get loans that are guaranteed by the FHA. They can get the same FHA guarantee by lending on homes that are not underwater.

Donovan says Obama urges Congress to approve his refi plan to "give families the choice to refinance … to put the power in the hands (of borrowers)."

Unfortunately, even if Congress approves the plan, the decision power would remain in the hands of lenders. They get to choose whether they are willing to refinance your mortgage or not. Obama's latest plan doesn't change that.

Follow me on Twitter @Polyanad

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Oh My
March 16, 2012 at 9:24 pm

I have a low credit score of 633 so I couldn't get a mortgage. So I did the only sensible thing I could do. I paid cash for my house.

Because sensible people save their money and don't spend every nickel like there's no tomorrow.

So, why is my credit score so low? Because I never borrowed money and will never need to in the future.

Saving is good try it.

March 14, 2012 at 6:43 pm

HARP needs to remove the loan signing date of May 2009. I bought Aug 2009, so I do not qualify for the HARP refi opportunity.

March 06, 2012 at 7:43 pm

P.S. In 2008 on the campaign trail Obama promised that he was going to cut the deficit in half by the end of his first term. He's added 5 trillion (and going up every day) to the deficit (more than every President before him COMBINED) Personally I think he's a master hypnotist, he's got the whole world bamboozled.....

March 06, 2012 at 7:40 pm

Soooooooo the administration is "HOPING" that Lenders will refinance loans..... that they really have no incentive to refinance. Call me crazy but that doesn't sound like a plan it's wishful thinking. In the military we had a saying "Hope is not a plan" Obama is one heck of salesman but all of his rhetoric and "HOPE and CHANGE" hasn't amounted to much. Seems like every company that the fed has spent money on is failing, the economy still sucks, gas is going up, Iran is very close to being a nuclear power and Obamacare hasn't even kicked in yet. Seems like a train wreck is coming.....