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Banks can’t say no to refis? Huh?

By Polyana da Costa · Bankrate.com
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.

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15 Comments
Sam
March 03, 2012 at 9:09 pm

I have an in house loan with a bank. (ARM at 6.9%) No, I can't refinance because as everyone, my appraisal has dropped. However, for $1100.00, the will give me a rate modification down to 3.75%, 10/1 ARM which drops my payment by $250.00 each month.
Credit score of over 800, but still being punished.

Jack Murphy
March 03, 2012 at 12:38 pm

Home ownership is a big responsibility. Not only do you have to service the note but also you must maintain and repair as necessary. A person has to project sufficient income and ability to cover unexpected maintenance and repair costs before commitment to this obligation. The old formulas that were guides to loan to value, income to loan, etc. were valid and prevented both lenders and borrowers from imprudent decisions. Lenders and borrowers who took the risks and lost need to accept the results of their decisions and not ask anyone else to ease the pain. It's your situation; you own it.

Frustrated
March 02, 2012 at 8:53 pm

When will they do something to allow people who do not have a Fannie Mae or Freddie Mac loans the opportunity to refinance??? I have good credit, but sadly bought when interest rates were 7 with an equity loan & my house was appraised $100,000 more than now...Thus I am 40,000 upside down :( All I want is to pay to refinance at the lower interest rates that are out there, that I am more than eligible for w/ my credit score. The lady I have been trying to refinance with for 4 years has finally told me I should just take a credit hit & apply for a modification because I am finally eligible for a refi, but will have to pay 10,000 in fees to do so....Oddly I am so upside down that I am too much of a risk to refi, but they will allow me to do it if I go 10,000 deeper & they are allowing it to be rolled in...MAKES NO SENSE!!!!!

Tom
February 29, 2012 at 1:09 pm

G Money - the lender still has to underwrite and approve the loan regardless of what FHA is saying. The mortgage originator bears the risk associated with closing/funding a loan. While FHA may insure the loan, that doesn't mean anyone wants to own it, service it or buy it.

Jim
February 29, 2012 at 9:18 am

ANYONE who was stupid enough to sign the line on a home loan that they could not possibly afford OR stupid enough NOT to ask the right questions before signing OR did not bother to READ what they were signing first is too stupid to own a home.

The fact that the libtards want to place all the blame on the banks and not a shred of blame on the B.S. policies they rammed down the throats of the banking industry is only believed by those who have to pull down their zipper in order to take a breath.

2.5 times your income is all the house you can afford worked for decades before Clinton and the other RATS on the Demo side of the aisle changed the rules to suit their pals and secure additional votes. Oh, and if you have no income, you have no house. I and all of the other responsible tax payers owe you squat, nadda, zip, zilch, go into bankruptcy and then go rent like you should have been doing all along.

I don't tolerate insessent whining from my kids and I'm sure not going to tolerate from a bunch of people who got in over their heads and now feel "entitled" to keep their homes. News flash - it never was YOUR home. Until you receive the "PAID IN FULL" from the lender, it is THEIR home.

Jesse
February 27, 2012 at 10:37 pm

Polyana, You are right on the money (npi)! It is all up to the lenders as to what modification, HARP, HAMP, etc. they participate in if any of the above. I have been told so many lies by my credit union that I hope that they can sleep at night, cuz I sure can't knowing I will be out in the cold due to false lending tactics. Plus I am a poor old cancer victim trying to do the best I can to stay alive. I dunno, I have lost all "faith in lending" talk about "truth in lending" B.S. FALSE Lending should be more like it. I don't know what will get me first, my cancer or my foreclosure. Saga Continues. Thanks for listening.

G money
February 17, 2012 at 12:10 pm

I believe once the FHA loan is approved, the borrower can pay off the old loan to the servicer/private lender. There is no penalty to pay off the old loan in advance.

Then the servicer/private lender is required to create an account for the new FHA loan. If the borrower defaults, the FHA will cover the default on the loan and repay the servicer/private lender.

So in this scenario, the banks must allow the transactions.

Jack Kinch(1uncle)
February 13, 2012 at 1:17 pm

Contracts are no longer legal? Not with vote buying demorats.

Bill Gold
February 07, 2012 at 5:46 pm

The banks can charge enough fees to make it all worthwhile. You don't think refinancing is free do you?
Plus there are enough idiot investment managers out there to continue making the resale of loans profitable. A bank can profit on the refi and then again on the resale of the loan.

Benjamin
February 05, 2012 at 10:02 pm

The banks themselves are actually just a bunch of crooks.