Refinance Rush Leaves Many Behind

Feb. 12, 2008— -- Larry is running out of time. This spring the interest rate on his home loan will increase, and though he and his wife earn more than $90,000 a year, Larry doesn't believe they'll be able to afford higher mortgage payments.

He has tried to refinance his adjustable rate mortgage with three different lenders but was rejected by two, and it's unclear whether he'll be able to get any help from the third.

The father of three, who asked that his last name be withheld, has admittedly poor credit and is worried that his family will lose its suburban Ohio home.

"I guess I've just got to find somebody who will invest in me and give me a second chance," he said. "I don't know if there's a whole lot of people out there doing that."

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Larry is one of an increasing number of homeowners, encouraged by falling interest rates, who are rushing to refinance. Last month, the Mortgage Bankers Association reported a 92 percent increase in refis since the beginning of November.

"If you have good credit, are in markets where house prices are stable and the loan is, say, under $417,000, then you will probably have no trouble refinancing, and probably on very good terms," said MBA chief economist Doug Duncan.

But experts agree that significant numbers of homeowners are being left out of the refinancing rush. Those with poor credit, those with "jumbo loans" -- loans worth more than $417,000 -- or those who, thanks to dropping home prices, owe more than their homes are worth likely won't be able to find attractive refinancing options.

The number of clients who have been rejected for refinancing or can't get the terms they want is double what it used to be, said Stephen Kaempf, the president of Choice One Mortgage, a mortgage broker in Lake Zurich, Ill.

Badly bruised by the subprime housing crisis, banks have tightened lending regulations, and homeowners who in previous years might have had an easy time refinancing are finding today's climate nearly impossible.

"I think people are going to have to raise their game," Kaempf said, "or be out of the game."

Last week, the Federal Reserve reported that more than half of U.S. lenders surveyed strengthened their requirements for potential "prime" loan borrowers, while more than four in five banks had tightened their criteria for nontraditional loans, including subprimes.

"Banks only have limited funds to lend, so they're going to be particular about who they're going to lend to," said Melissa Cohn, the president of the New York-based Manhattan Mortgage Company. "Basically, they're demanding a better borrower."

Homeowners who don't meet the tougher borrowing guidelines still have options. Some, including those who are behind on their loan payments, might qualify for refinancing through loans insured by the Federal Housing Administration. The loans are capped depending on the area of the country in which you live, but the economic stimulus package recently passed by Congress will -- if signed by the president -- raise those limits in expensive places.

The package will also temporarily expand the number of loans considered "conforming" -- not jumbo -- loans. The limit will be raised from $417,000 to as high as $729,750, a cap that, again, is regionally dependent.

"The increase in those conforming loan limits will open the doors for refinancing for a lot of homeowners in markets like California and New York that at this point have been on the outside looking in," said Greg McBride, senior financial analyst at Bankrate.com.

McBride said that the best bet for many is to talk to their current lenders to work out a palatable deal, such as an interest-rate freeze.

"Hundreds of thousands of people go into their foreclosure without ever going to their servicer," said Keosha Burns, a spokeswoman for the Hope Now alliance, a group that encourages at-risk borrowers to call their mortgage servicers and credit counselors.

According to a recent study by Hope Now, 473,000 at-risk borrowers benefited from repayment plans and loan modifications, including mortgage refinancing, between October and December.

"We all see there's definitely more work to be done," Burns said, "but we think that is a great start."

Larry, however, is less optimistic. He's been talking to his current lender, which "hasn't been a whole lot of help."

What he really wants, he said, is a fixed-rate mortgage, though he's willing to settle for less.

"I don't want to get in another bad situation," he said. "I don't want to just put a Band-Aid on it."