Issues with refinancing

If the government really wants to help homeowners and the economy, it should make refinancing easier and the rates lower. The banks are paying the lowest rates in over 50 years, but this is not being passed down to consumers. In instances where the banks are providing a competitive rate, the fees they are charging to get that rate and to refinance take the appeal out of refinancing. As part of our process improvement initiative for the government, we are going to provide recommendations on how to improve the mortgage refinancing process so that homeowners would see an immediate benefit, which would help with the economic recovery.

Current Process

Refinancing is almost identical to a new mortgage, home purchase process:

Complete application

Pay application fee

Pay rate lock-in fee

Perform appraisal

Perform closing

Once application is completed, process can take anywhere from 2 weeks to 60 days.

Average costs (for a $250,000 mortgage refinance on a home valued at $400,000):

Title Insurance            1,280
Courier/Messenger Fees        35
Processing Fee            550
Application Fee            750
Recording Fees            70
Settlement / Closing Fee        387
Closing Service Letter            35
Tax Service Fee            84
Loan Discount Points            3125
Total Closing Fees:            6316

Pre-Paid and Escrow fees

Hazard Insurance Premium        625
Per diem interest for 17 days        538
Hazard Insurance Reserves        104
Real Estate Tax Reserves        1000

TOTAL CASH NEEDED AT CLOSING     $8,584

These are actual rates taken from Chase website. Depending on bank, these costs may be higher or lower. The discounts points can be eliminated, but you will have to pay a higher interest rate.

Aside from Transfer fees and taxes, these closing fees are actually higher for a refinance than for an original home purchase, when both were compared on the Chase site.

Mortgage insurance (approx $80) will also be added if the equity is less than 20%.

Keep in mind; these fees are for someone with outstanding credit score and 37% equity. Most people will actually pay higher fees and rates, or be turned down flat. Complications that will delay the process, increase mortgage rate and fees or result in denial include:

    Home value decreased, resulting in reduced equity

    Decreased credit score, regardless of reason

    Reduced income

 

Proposed Process:

Complete application

Pay small application and processing fee ($100 or less)

Rate adjusted to government mandated rate. Number of years left on mortgage remains.

Once application is completed, process should not take any longer than 2 weeks.

 

Benefits:

Monthly expenses reduced enough for consumers to have an impact. Consumers will have additional cash that can be applied towards purchases which would help to stimulate the economy.

Fewer Foreclosures: The value of housing would stop declining. Less people would be left homeless.

Toxic assets would be valued properly

Most investors will know the value of their mortgage backed investments.

 

Disadvantages:

Banks would not make as much money on refinancing mortgages.

Some investors would get a lower rate of return on their mortgage backed investment.

 

Next steps:

Since the banks have been unwilling to simplify this process on their own, the government should stop providing any additional bailout money to the banks and instead provide money to Fannie and Freddie to refinance mortgages using this process.

Any banks that fail and are taken over by the government would automatically convert to this process and begin refinancing mortgages in this fashion.

Banks that ultimately do get more government funding would have to perform refinancing using this method as a condition of the funding.