Everybody wants to help keep people in their houses and out of financial stress and foreclosure, right?
That's what the Bush administration says, and that's what top executives of major banks, mortgage companies and Wall Street investors all say.
But where the proverbial rubber hits the road -- at the point where individual homeowners seek to refinance or modify their mortgage terms -- things may look different.
Take the case of Robert Whittaker, a Sykesville homeowner who sought to refinance a $260,000 first mortgage recently when 30-year rates fell below 6 percent. Whittaker was concerned that his interest-only adjustable rate loan was scheduled for a hefty payment reset that could be a strain.
Whittaker, who bought his house four years ago, contacted a mortgage broker who was able to arrange a new $260,000 loan locked at a favorable fixed rate of 5.5 percent for 30 years. All that was needed was for the lender holding a $70,000 second mortgage on Whittaker's house to agree to a routine request that its second lien on the property would remain "subordinated" to the new first mortgage. That is, the second-mortgage holder would remain in its existing second payoff position in the event of a foreclosure.
Whittaker expected no problems: He wasn't seeking to increase his overall debt, his credit scores were solid, Fannie Mae approved the transaction, and his appraisal came in at $384,500 -- nearly $55,000 above his combined mortgage balances. As he puts it, "all I was doing was just trying to cut my monthly payment, not increase anybody's risk."
His broker submitted the request to the second mortgage lender, Cleveland-based National City Corp., on Feb. 1, expecting quick approval. Then came the shocker: On Feb. 18, the bank told employees in an internal memo that it was no longer approving requests nationwide -- whether pending or in the future -- for subordinations from second mortgage customers such as Whittaker, whose first mortgage was with another firm. The policy change had blanket effect -- no exceptions -- and touched potentially large numbers of second mortgage customers of the $150 billion-asset bank.
A spokesman for National City, William Eiler, declined to provide the number of loan customers affected, and said the bank's reasons for making the abrupt policy switch were "proprietary." Asked whether blocking customers' ability to refinance could push some of them into foreclosure after payment resets, Eiler said "we cannot predict that this might occur." The internal memo, a copy of which was provided to me, acknowledged that the new policy could be controversial -- it "may not be widely accepted by our customers."
Whittaker's broker, Joseph Liberto, co-owner of Immediate Mortgage Inc. of Ijamsville, called National City's action "absolutely outrageous. Here we have our (federal and state) governments trying to help out people who are facing big payment increases, and we've got lenders refusing to cooperate -- even when it makes sense for everyone involved."
The change at National City illustrates how declining market conditions in many parts of the country are having unanticipated side effects on borrowers with second liens.
When property values were soaring, requests for subordination were rarely denied if homeowners had decent payment histories. But with prices depreciating in many markets, banks are worried that, even if customers have sterling credit, the bank's security interest in a property may be whittled away.
Take this hypothetical example: Say the owner of a $300,000 house had a $200,000 first mortgage and a $50,000 second -- total debt equal to 83 percent of property value. But if house prices drop and the market value of the property slips to $265,000, now the total debt equals 95 percent. The second mortgage holder is likely to lose money in a foreclosure.
Bottom line: If you've got a second mortgage and need to refinance, the second lien holder could stand in the way. Your main option after that: Qualify for a new first mortgage big enough to pay off the second.
Robert Whittaker might be able to swing that, but his rock-bottom refi rate could be gone email@example.com.