The Real Problem With Mortgage Refinancing

I confess: I am somewhat of a serial refinancer. Since my husband and I bought our home in the summer of 2006, we have refinanced twice. That’s three mortgages within four years of homeownership. (Can you blame us, though? Our rate dropped from 6.35% for a 30-year fixed loan in 2006 to 5.35% for a 5/1 ARM in 2008, to the current 4.1% for a 5/1 ARM. With a full percentage point or more decrease each time, we recouped our closing costs in less than a year.)

There’s a reason why I’m telling you this. I’d like to share our latest refi experience: a story in which two homeowners with perfect credit, payment history and a property that, miraculously, had retained its value through the housing bust, were almost unable to refinance due to a string of clerical errors and delays at the bank. A story that, I believe, will resonate with thousands – perhaps hundreds of thousands – of homeowners who have been in that boat in recent months.

The bait

It all started in early March, when my husband noticed that mortgage rates have gotten irresistibly low (again). He called our lender – Chase Home Finance, a unit of JP Morgan Chase – to check the current rates on a 30-year fixed loan or ARM and was quoted a 5/1 ARM at 4.125%. Wow. That’s low.

By refinancing, we calculated, we would lower our monthly payment by more than $300 and recoup any refinancing costs within no more than 10 months. (A quick side note here, the property in question is a coop apartment in New York City, so closing costs do not include title insurance and are generally much lower than those for condos or single-family homes.)

We locked in a rate and the process officially kicked off. Our credit check revealed scores ranging between 772 and 811. Before we knew it, an appraiser with a camera showed up at our door, took notes, snapped a few pictures and left.

The snag

Then, the surprise. Well, sort of a surprise. According to the appraisal report, we were 2 percentage points shy of the 20% equity most lenders now require for a conventional mortgage.

Tough luck, right? We all know where the real estate market is today. Given that we actually still owned 18% of our home, we could consider ourselves lucky. Roughly 24% of homeowners with mortgages owed more to the banks than their homes were worth at the end of the first quarter of 2010, according to a report by CoreLogic, a provider of financial and property information and analytics. (A commonly used term for homeowners in this situation is “under water.”) Another 4% owned just 5% equity or less. So we were better off than at least a third of American homeowners, even though we bought our place at the very height of the real estate bubble.

My complacence quickly turned into frustration when we discovered that the appraisal was wrong. The key error: our apartment had been deprived of 40 square feet. Those 40 square feet, if multiplied by the per-square-foot price the appraisal pegged on our property, would add just enough equity to put us right at the 20% mark.

Bingo, we thought, and quickly followed up with our mortgage officer at Chase.  We faxed a number of documents displaying the actual square footage (the appraiser claimed that they got their number from the “deed of trust,” a document used to pledge a property as security when financing a condo or single-family home – but not used for coop financing. There were other errors as well, but let’s not get into that.)

Then we waited. And waited. Nearly two months had gone by and our rate lock would expire in two weeks. After several unanswered phone messages to the lender, we were informed by email that our loan processor had changed. Messages for the new loan processor went unanswered just the same.

The switch

On May 10, the bomb arrived: a letter from Chase informing us that we did not qualify for the mortgage we had originally been approved for, but the bank was happy to offer us another. A 30-year fixed loan at 5.3% that, I quickly calculated, would decrease our monthly mortgage payment by a little over $30.

When we called to find out more details (and decline the new offer – why spend more than $3,000 to lower our monthly payment by $30?), things got even more confusing.  Our new loan processor informed us that we had been approved for a refinance loan under the government’s Home Affordable Refinance Program, or HARP. The new payment? He fired up a number that was actually $600 more than our current mortgage payment.

Wait a minute… what? Who in their right mind would refinance in order to increase their mortgage payment by $600?

What happened with the documentation proving the appraisal was wrong? Our loan processor didn’t know the answer to that question, but he informed us that we had verbally agreed to the HARP loan and it was already in the works.

The happy ending…

This is where I, at wit’s end, did something that most homeowners don’t (or can’t) do: I called Chase’s media relations department and told them our story. I spoke with Tom Kelly, the bank’s chief spokesman on the mortgage beat, whom I’ve worked with in the past in my role as a personal finance writer, and asked him for a comment or explanation. Kelly did something more that that: he took my information and said someone would look into the case and give me an update soon.

Within days, the tide turned. We received a call that everything was back on track. Before we knew it, we were in a lawyer’s office, signing the paperwork on our new 5/1 ARM at 4.125%, with a monthly payment that, as originally intended, was $300 lower than our payment at the time.

And there you have it. Our happy ending. But why don’t I feel that happy?

The real problem with mortgage refinancing

I keep thinking of the thousands – perhaps even hundreds of thousands – of homeowners who didn’t call the Tom Kellys of their bank when they found themselves in a similar situation.

The inability to refinance because you don’t have enough equity is a too common problem these days. (This, by the way, was also Kelly’s official response to my query: “I expect that many, many borrowers can’t refinance because they don’t have the equity now – and because lenders may be requiring more equity,” he wrote in an email.)

But for many homeowners, the problem might be an erroneous appraisal, a clerical error or a delay at the bank.

The success of the government’s HARP program, meanwhile, continues to be a big question mark. Through April 2010, the government reports that “over 4 million borrowers with [qualifying] mortgages refinanced, saving an average of $150 per month.” (Those numbers are nowhere nearly as detailed as the reports on its sister loan modification program (HAMP), which, let’s face it, isn’t going all that spectacularly. Since the program’s inception in March 2009, almost 300,000 borrowers have been granted permanent modifications, according to the report – out of more than 3 million who are under water and qualify for the program.)

So let’s say 4 million people have so far refinanced successfully and are saving an average $150 a month. $150 a month? How much did they spend on closing costs and how long will those take to recoup? Is it possible that some homeowners agreed to a HARP loan because they were told they had no other option, without thinking over the details?

If you find yourself in this situation, speak up. Fight erroneous appraisals. Fight bait-and-switch mortgage offers from lenders. If the mortgage officer suddenly stops returning your calls, find your bank’s Tom Kelly (hopefully he or she is as helpful as the real Tom Kelly!) and lay out your story.

Then tell that story to the world. Blog about it. Contact the editor of your local paper. Post a comment to this story. Mortgage rates, at an average 4.76% for a 30-year fixed loan and 3.75% for a 5/1 ARM, according to Bankrate.com, are incredibly low and there’s no reason why homeowners who can take advantage of them shouldn’t.

Wait a minute… 3.75%? Wow. Now that’s low!