Costs and Tighter Rules Thwart Refinancings

As mortgage rates hit new lows every week, the number of homeowners seeking to refinance their homes has spiked to its highest level in five years.

But many have been unable to win approval for their applications. And even some of the homeowners who do qualify have backed off, once they found out how difficult it was to get the advertised rate.

So what should be a bright spot in an otherwise dismal economy — throngs of homeowners locking in low, fixed-rate mortgages that will free them up to spend elsewhere — threatens to become another example of how even the best government intentions do not always pan out.

That was the case when the government, through its Troubled Asset Relief Program, started pumping money into banks with the goal of shoring up their balance sheets and spurring lending. And it appears to be happening again as the Federal Reserve buys up mortgage securities. The Fed is pushing down interest rates, but that has not been enough to bring the housing market back to life.

While rates are falling, borrowers face higher costs every step of the way, from rising fees for mortgage insurance to added costs that drive up the mortgage rate. At the same time, lenders have become more cautious about whom they will lend to, as more people lose their jobs, watch their incomes decline and fall behind on their bills.

One of the biggest stumbling blocks for many people is their plunging property values, which have erased all or most of the equity in their homes. Others cannot meet the increasingly stringent credit requirements, which either disqualify them or increase their costs.

“Refinancing is a very difficult proposition right now,” said Mike Stoffer, president of Stoffer Mortgage in North Canton, Ohio. “The loss of equity and tighter credit standards are making it difficult for a lot of people to refinance.”

Major banks and mortgage brokers agree that the number of qualified borrowers has dropped significantly. By some brokers’ estimates, only 30 percent of applicants in certain markets are actually closing on their refinancing applications. In contrast, in the first half of last year, about 60 percent of applications were approved, according to the Mortgage Bankers Association.

And only a select few borrowers with pristine credit can secure the most attractive rates: for the week that ended Jan. 15, rates on a 30-year fixed mortgage sank to 5.12 percent, the 11th consecutive weekly drop and the lowest rate since the big mortgage financer Freddie Mac began tracking them in 1971.

Earlier in this decade, during the real estate boom, many borrowers purchased their homes with little or no money down, meaning that even a small drop in value could wipe out any home equity. Even homeowners who initially put down 20 percent or more have seen the value of their stake fall. As a result, many homeowners need to come up with a pile of money, essentially a new down payment, to raise their equity to at least 20 percent. Otherwise they have to buy private mortgage insurance.

Alternatively, consumers could just buy the mortgage insurance. But getting the insurance is no longer simple. Private mortgage insurers, which incurred large losses when the housing market collapsed, have become much more selective. They also are charging more for their service. Even if a borrower does qualify for insurance, the increased costs often wipe out any savings from refinancing, mortgage brokers said.

In Arizona, California, Florida and Nevada, housing markets that are hardest hit, at least two insurers are now requiring borrowers to have at least 10 percent equity in their homes and a credit score of more than 720. About 48 percent of Americans have scores less than 699, according to Fair Isaac, the company that computes FICO credit scores.

In other markets, the insurers are requiring a credit score of at least 680 — an indication of how the definition of a good credit score has changed as the economy has deteriorated.

On top of that, Fannie Mae and Freddie Mac, the two big mortgage guarantors now under government control, have raised the fees they charge lenders on loans that they insure or buy. Those fees — in part the result of the two agencies’ losses in the housing market — are passed on to borrowers, with Fannie’s latest increase about to go into effect.

While the agencies have always charged more for mortgages for riskier borrowers, their fee structure has steadily risen over the last year. Applicants with credit scores above 720 and equity of more than 20 percent in their homes still generally escape these fees. Other applicants may qualify for refinancing but must pay the higher costs. ll borrowers pay a fee known as an “adverse market delivery charge” of 0.25 to 0.50 percent of the loan amount. Fannie, for example, also imposes a fee of 0.75 percent on owners of a condominium or cooperative apartment with less than 25 percent equity. Borrowers with a home equity loan or line of credit may pay another Fannie charge of up to 0.50 percent, depending on a variety of factors. And borrowers who want to take cash out of their homes when they refinance — if they have enough equity — are charged a fee ranging from 0.25 percent to 3 percent of the loan amount, depending on their credit score and amount of home equity.