NEW YORK, Sept 11 (Reuters) - Some 57 percent of mortgage broker customers with adjustable-rate loans were unable to refinance into a new loan to avoid higher monthly payments in August, a national survey reported on Tuesday.The poll of 1,744 brokers in the last week of August found that subprime borrowers had trouble refinancing mortgages because loan programs were no longer available, according to a statement from Campbell Communications, the Washington-based research firm that conducted the survey. Prime borrowers were impeded by appraisals and high loan-to-value ratios, it said. Original Article
The fear within the industry has risen dramatically. Many banks and lenders have resorted to cutting appraisal reports from reputable firms 50-100k to deny loans or to limit their risk. This is happening especially in CA. The lenders that are standing have tightened guidelines and leaned on the appraisal review department to knock down values. I have seen appraisals with 5-6 comparables from sales in the last 45 days cut down in value because the lenders appraisal review department thinks values aren't there anymore. The comments note that it is a soft market and they point to the amount of inventory in the area.
These are not high risk refinances. They are 75-80% loan to value refinances for home owners with perfect credit. Appraisal review has often been a mechanism that lenders use to limit risk. World Savings is notorious for having very low appraised value reports from their in house group, which is all they allow under their loan products. They are owned by Wachovia and the CEO commented recently that their pay option arm(read:NEGAM) loans are fine and the business is working well for them. Well, of course it is, they only loan to 80% of their fire sale appraised value number to prime credit levels. We would have to have a depression for Wachovia to worry about their loans.
The practice of having standard prime lenders cut appraisals as a protection method is creating a vicious loop. I would strongly advise anyone that has an adjustable loan to seriously review their financial situation and loan terms.
If values are falling in your neighborhood and you have a large balance vs your CURRENT home value you need to evaluate if you can handle your current loan and any future adjustments throughout the credit storm which could last for several years. Most adjustables are made with a margin against the 1Y LIBOR index(definition below). Which as of today was 5.23%. Most loans max at a 2% adjustment per year. They usually cap at 9.95%. The majority of folks that purchased or refinanced with an adjustable in 02-05 will start to adjust this year and into 2010. For a view of the reset please review older posts.
If adjustments would make things difficult in a year or two. I would advise looking at your refinance options now or consider selling your home. It should be a home not a modern debtors prison.
What it means: LIBOR stands for London Interbank Offered Rate. It's the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in U.S. capital markets and can be found in the Wall Street Journal. In general, its changes have been smaller than changes in the prime rate.
How it's used: It's an index that is used to set the cost of various variable-rate loans. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. Although it is increasingly used for consumer loans, it has traditionally been a reference figure for corporate financial transactions.
