Some Borrowers Hit New Snag In Refinancing

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The Wall Street Journal

Some Borrowers Hit New Snag In Refinancing
Home-Equity Lenders Get Tougher on People Switching To Cheaper First Mortgages
By RUTH SIMON
March 6, 2008; Page D1

In the latest sign of how the credit crunch is hurting even borrowers with good credit, some home-equity lenders are starting to slam the door on homeowners who want to refinance their primary mortgages. In some cases, homeowners who in the past would have been easily approved for a mortgage refinancing are finding that they can't get their home-equity lender to give the go-ahead, which is required to complete the transaction. Others are being told by their home-equity lender that they need to reduce the size of their loan or line of credit.

Approvals from home-equity lenders used to be routine, particularly if the borrower wasn't increasing the size of the mortgage as part of the transaction. But that's no longer always the case -- even in places where the housing market hasn't been hit by huge price declines. Such approvals, known in the industry as "subordinations," mean that the home-equity lender agrees to stand in second place behind the new mortgage and allow the existing first mortgage to be replaced by another first mortgage. Many mortgage refinancings continue to go through without a hitch. But some homeowners who want to lower their rates or lock in a fixed-rate mortgage can't, even if refinancing would save them money and put them in a better position to repay their loans.

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Cleveland-based lender National City Corp. last month stopped approving refinancing requests from borrowers who received a home-equity loan from the lender through a mortgage broker. Kristen Baird Adams, a National City spokeswoman, says the move was "consistent" with the company's decision last summer to stop making loans through mortgage brokers... Dale Betterton, a financial-software developer, was among those caught short by the change in National City's policies. Mr. Betterton bought a home in Boulder, Colo., this past summer with 5% down. When interest rates dropped last month, he decided to refinance. But National City, which holds his home-equity loan, declined to approve the deal. Mr. Betterton had "superb" credit and the new mortgage would cut his mortgage rate by more than a percentage point, making him a better credit risk, says his mortgage banker, Lou Barnes of Boulder West Financial. "My understanding was it was pretty straightforward to refinance when rates go down, and there wouldn't be any strange obstacles," says Mr. Betterton, who is now considering paying off his second mortgage so he can refinance.

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Homeowners with home-equity loans or lines of credit may be able to refinance more easily by simply paying off their loans. With home values falling in his market, Steve Walsh, a mortgage broker in Scottsdale, Ariz., says he's encouraging some borrowers who haven't tapped their credit lines or owe only a small amount to close down those lines, even if they have to pay an early-termination fee, which can run about $300.


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