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October 26th, 2009

There’s A Reason Refis Aren’t Getting Any Attention

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You don’t hear much about the Federal refinancing effort these days. In what started out as the focal point of the Treasury’s two-pronged attack on the housing crisis, soon became dwarfed by the rescue’s other facet: modification.

So why haven’t we heard much about the Making Home Affordable refinancing program lately? Perhaps it’s because the program isn’t doing well, or perhaps because the audience that it was designed for is opting for other solutions besides refinancing.

Despite being in the midst of a national refi boom, the Treasury’s refinance program has only reached about three percent of their desired audience, according to the Washington Post:

This effort has so far helped about 130,000 of the up to 5 million borrowers the Obama administration has said are potentially eligible, according to government data.

Ironically, the program is struggling during one of the nation’s largest refinancing booms.

“We’re seeing a lot of homeowners refinance out of products such as ARMs,” said HSH VP Keith Gumbinger.

What’s the problem with refis?

Let’s start with cost. Borrowers who refinance are required to pay closing costs. Such costs for refis are generally either equal to traditional closing costs or even more expensive for borrowers with the least amount of equity.

Next, there are a substantial amount of borrowers out there who purchased high-priced homes (compared to now) during the boom with little or no money down. Some of these borrowers are so far underwater that the years it would take to recoup their equity may not even make refinancing a worthwhile option. Even Washington’s effort to expand the scope of the refi program to borrowers with a loan-to-value of 125% hasn’t changed much:

Housing experts say these borrowers are calculating that their homes are no longer a sound investment. For example, a borrower who is 25 percent underwater [LTV of 125%] would spend nearly 10 years making regular payments before regaining any equity in the home, according to mortgage research firm HSH Associates.

Slow Start

The program’s output has been bogged down by some additional factors. For starters, servicers were required to use a new computer software system in order to refinance qualifying loans. Freddie Mac just recently began accepting loans with the 125% LTV. High customer volume as well as a number of logistical complications have also stalled the program somewhat.

Slow Finish

Sadly, even if the Federal refi program can get past these hiccups, we don’t foresee it being a viable member of the housing recovery going forward. From the onset we knew that the program’s expectations were far-reaching, and while the modification portion of Making Home Affordable seems to be the better half, even that program is failing for many reasons.

HARP Now Accepting Loans With 125% LTV
Is Refinancing More Underwater Loans Really the Answer?
Please Foreclose On My House!

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4 Responses to “There’s A Reason Refis Aren’t Getting Any Attention”

  1. Mitch Says: October 26th, 2009 at 9:37 pm

    I think there’s another big reason why refi’s haven’t worked out.

    Banks just weren’t giving up the money, that’s why. Earlier this year, even people with very high credit scores were being rejected for stupid reasons. Something we learn about people is that when they hear that others are having problems, they stop trying. Then when the banks got called on the carpet by the government, they said they weren’t getting a lot of qualified applicants. That’s also how racism works in business, by the way.

    That’s also why I’ve said that I believe credit scores have to go, because they don’t seem to mean almost anything anymore.

  2. Tim Manni Says: October 27th, 2009 at 12:32 pm

    Hey Mitch,

    “Something we learn about people is that when they hear that others are having problems, they stop trying.” — that’s a really interesting point, I never heard that.

    To your point on credit scores, I just read on the blog “Get Rich Slowly” that “A 2004 U.S. PIRG survey showed that 79% of credit reports contained either serious errors or other mistakes of some kind.” Those errors could cripple your score!

    Nice addition to the story, thanks,
    Tim

  3. Candy Small Says: June 25th, 2010 at 11:05 am

    The Home Affordable Modification Program or HAMP lowered my interest rate to 2%. Now my kids are going to be able to grow up with a backyard. The application was so confusing then my neighbor’s husband filled it out with me & I was approved in 28 days.

  4. Tim Manni Says: June 25th, 2010 at 12:09 pm

    Candy,

    Congrats!

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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