Underwater refinancing?

[southsider2k5]

That's kind of what I was thinking. How often does the bank go out of their way to re-determine the value of someone's house? vs. what the person is actually paying them for it?

 

You have to certify to it (the value of assets) at least once a year I believe.

[lostfan]

A lot of people preach about re-financing, and in some respects it CAN be a good idea. But what I've observed, most people do it wrong or do it for the wrong reasons.

 

First and foremost, unless your interest rate is dropping by MORE than 1 full percentage point, don't bother. Example: you are going from 5.25% to 4.15%. If it's less than that, it's really not worth doing. Now, add in the fact that you have to have your home re-assessed (this is a few hundred $), you will have to usually pay 1% of the loan amount up front (probably 1000$ more), and then closing costs, which they sometimes hide by rolling them into the loan (but you're still paying them). All told, you'll probably end up spending close to 2000-2500$ out of pocket to re-fi in addition to all the time you'll spend doing it, which is never fun.

 

Also, if you only had 25 years left on your loan you have 30 again albeit at lower monthly payments.

 

Something important to keep in mind about this is it's all based on a bet. Do you really believe the dollar is collapsing or moving toward hyper inflation? If so, is the re-fi really worth it long term? Additionally, why try to pay off your loan early? Reason I ask this is because you're paying to do this with 2011 dollars...which they love. If those things happen, you'll probably notice that in 10 years, you'd be paying them off with money that's worth far less, and much easier to get. If those things don't happen, and the dollars value skyrockets, and money becomes increasingly hard to get, well -- you still didn't lose anything. Always keep in mind that when they tout re-financing, they'll show you a "total dollar savings" in one up-front lump sum, which is disingenuous because the money is actually spread out over a 30 year curve. Will it save you money over time? Yes...but at what up front cost versus what will those dollars end up being worth in 10 years, or even 20?

 

The problem with "home equity" is it's dead money. Why? Huh? Think about it...if you want that money back, YOU HAVE TO BORROW IT FROM YOURSELF. Ever hear of or take out a "home equity loan", which is the biggest fool loan in the history of the world? Funny thing, they're loaning you YOUR OWN MONEY and you're paying them to do it.

 

The only time you need to care about home equity is when you're SELLING. Otherwise, don't worry about where you loan stands so long as you have a good interest rate and the stability to make the payments. Whatever the case may be, so long as you planned on living there for the foreseeable future, in 10-15 years, odds are the housing market will have stabilized and at the very least, you won't sell into a market where you'd take a loss.

In my case I would be going from 6.25% to whatever it is today, I guess in the low 4s (I have almost flawless credit). It'd drop my payments by, I'm guessing, $300 or so. That's worth it and I'd start to recover that money after a year or so. I hear you about inflation, but from here to about 2016 is just a dead zone for me.

 

These are all really good points.

 

I just want to add one more... as Y2HH said, there is a significant upfront cost to refinancing. So one thing you want to watch out for is, what is your time scale? If you plan to sell your place in a year or two, then even that 1% change is likely not worth it, because the upfront points and fees will wipe out your savings over such a short timeline.

I didn't buy the house to sell it right away, but I did plan on having some equity after a few years so that I could sell this place and get a bigger place eventually. That's pretty much impossible for me right now. So time frame would be like 3-5 years.

[NorthSideSox72]

You have to certify to it (the value of assets) at least once a year I believe.

 

But the house that a loan is against is NOT an asset in the sense of other assets a financial instituion holds. There is a difference between an asset you unencumbered, one that you own but also hedge against, and finally, one that you do NOT own but have a LIEN OR RIGHT against. The last scenario is the case here, and I could be wrong, but I am pretty sure that they don't have to revalue those annually. Maybe they should, but right now, I just don't think the banks are reassessing every real estate piece they have a loan against every year.

 

[Balta1701]

Hey, even found the right thread.

A group of over 50 House Democrats are calling out the Obama Administration for their management of the HARP 2.0 program. In a letter to Treasury Secretary Timothy Geithner and Acting Director of the Federal Housing Finance Agency Ed DeMarco, the Democrats, led by Rep. Maxine Waters, point to data showing that the new version of HARP, designed to steer more refinancing to underwater borrowers, simply isn’t meeting those goals.

 

The Obama Administration has been touting the HARP 2.0 changes as a way to unlock refinancing for borrowers who otherwise could not get it. However, only 21% of HARP loans in the first quarter of 2012 went to borrowers with loan-to-value ratios above 105%, according to Inside Mortgage Finance. This obvious outcome stems from the fact that banks have simply not implemented the changes to HARP in a way to facilitate underwater refis. The letter addresses how banks are either ignoring or gaming the system:

 

The participation of banks in HARP 2.0 is also a problem. According to the Federal Reserve’s April 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices, 70 percent of banks are either not actively soliciting HARP 2.0 applications or have participated very little in the program.

 

For the banks that are participating, many of them have added their own requirements on top of HARP 2.0 requirements that are either pushing otherwise qualified borrowers out of the program or forcing them to refinance at a higher price. For example, several major banks are not refinancing loans that they do not already service. This prevents homeowners from shopping around for the best price, a task that is essential since banks are charging higher than market rates for HARP 2.0 refis. According to one analysis, banks are charging between 3.5 and 7 points for HARP 2.0 loans, with some banks charging even more.

[Chisoxfn]

Now wait, I am not 100% sure it works that way. Doing that would require the banks to re-value homes regularly, and they don't do that. Furthermore, the bank does not own the asset - they have a lien against it.

 

As I understand it - and I admit this is more from the investment side of the world, not retail loans - loans are assessed by risk level and assigned a projected % of loss. The bank then has to maintain assets to protect against that level of anticipated loss, plus some degree of margin as specified by banking regulations. They got in trouble before by building the math based on the assumption that home values were always at least what they were at the time of loan origination. When that ceased being true, it all fell apart (this is the mortgage aspect of the fall-apart).

 

Now, one way to address that COULD be to force revaluation of homes and look at LTV ratios in assessing capital requirements... but I didn't think that was actually being done, at least not yet.

I'm a little late to the party, but you are right Matt. One of the primary areas I work in is related to this specific topic.

[Chisoxfn]

Now wait, I am not 100% sure it works that way. Doing that would require the banks to re-value homes regularly, and they don't do that. Furthermore, the bank does not own the asset - they have a lien against it.

 

As I understand it - and I admit this is more from the investment side of the world, not retail loans - loans are assessed by risk level and assigned a projected % of loss. The bank then has to maintain assets to protect against that level of anticipated loss, plus some degree of margin as specified by banking regulations. They got in trouble before by building the math based on the assumption that home values were always at least what they were at the time of loan origination. When that ceased being true, it all fell apart (this is the mortgage aspect of the fall-apart).

 

Now, one way to address that COULD be to force revaluation of homes and look at LTV ratios in assessing capital requirements... but I didn't think that was actually being done, at least not yet.

They do look at the ratio's but it is on a rotational plan that they will update the valuations of the underlying properties. It would be physically impossible to do an annual valuation on every loan a residential lender has debt to.

[Chisoxfn]

Yes, and then attempt to gain relief via seizure of the linked asset - the home. But as I said, I really don't think SOX required what you are suggesting for mortgages. Though it might be a good idea to do things that way, as it might give a better indication of the actual capital health of the banks.

On a sidenote, none of this is related to SOX. If you guys want to look up the specifics, you can go to ASC 948 (talks about all the specifics on Mortgage Banking Accounting Guidance; You can find it on the fasb's website).

 

It takes quite a bit to take losses on these loans. They will disclose the fair values, but it is an approximation and the fair value is primarily based upon the rates of the loans vs. current market rates (so often times a loan with a high interest rate shows up with a strong fair value, but the reality is, that loan might be on a property that is way underwater and really isn't worth even close to that).

[Chisoxfn]

SOX requires proper and regular asset valuation. That is the biggest reason that most banks went under. It wasn't runs on deposits.

SOX was not related to this. SFAS 157 (and formerly SFAS 109, IIRC) are what cover the fair value disclosure requirements and neither are related to SOX.

[Chisoxfn]

But the house that a loan is against is NOT an asset in the sense of other assets a financial instituion holds. There is a difference between an asset you unencumbered, one that you own but also hedge against, and finally, one that you do NOT own but have a LIEN OR RIGHT against. The last scenario is the case here, and I could be wrong, but I am pretty sure that they don't have to revalue those annually. Maybe they should, but right now, I just don't think the banks are reassessing every real estate piece they have a loan against every year.

You do assess there fair value annually under SFAS 157, however, it isn't a true fair value and it is for disclosure purposes. Only when you've gotten to the point that you truly don't expect to recover the payments on the loan, do you run into the point where you will have a write-down on the loan (and set-up a reserve). And in many instances, you pretty much aren't at that point until the payments stop coming. The fair value disclosure for each of the big banks will disclose how they calculate the estimated fair value and typically it is based upon the interest rates compared with market rates, which isn't always the best approach but is an acceptable approach.

 

The real kicker is the LTV ratio's which the allowance is typically based upon. It would be impossible (and I know I've said this in another post) to calculate the fair value of the underlying collateral for every property owned, so the companies do it on a rotational plan and get some of the information in this analysis, and if a loan is impaired, they will look to the underlying collateral (as you would never write it off more then the underlying fair value of the collateral you'll receive) as the new carrying value of the loan.

[kapkomet]

SOX was not related to this. SFAS 157 (and formerly SFAS 109, IIRC) are what cover the fair value disclosure requirements and neither are related to SOX.

 

This is semantics but SFAS 157 was a direct result of the mess that SOX also came out of. His point is valid even though he had the technical standard wrong.

 

Of course this gets into the whole big ass post I never posted for 3 years about fair market valuations and mark to market, but why would I post that now?

[Balta1701]

This is semantics but SFAS 157 was a direct result of the mess that SOX also came out of. His point is valid even though he had the technical standard wrong.

 

Of course this gets into the whole big ass post I never posted for 3 years about fair market valuations and mark to market, but why would I post that now?

To ruin the running gag, of course.

[kapkomet]

To ruin the running gag, of course.

 

 

I know, right? I mean, I have a shabby reputation to uphold.

[Chisoxfn]

This is semantics but SFAS 157 was a direct result of the mess that SOX also came out of. His point is valid even though he had the technical standard wrong.

 

Of course this gets into the whole big ass post I never posted for 3 years about fair market valuations and mark to market, but why would I post that now?

Well, SFAS 157 was a more advanced version of 107 (I believe that is what it replaced at least). Irregardless, it came out about 7 years after SOXso they really weren't related. Unless we are going to say every new guidance that has came out since SOX was because of SOX.

 

The reality is, there has just been so many issues that have came up in recent years and everything is continuing to push down the road of more and more disclosure. Things are going to get crazy shortly with the new investment ASU. The 157 disclosures were already pretty intense, now the sensitivity disclosures that will go along with them will be pretty crazy. They will also provide a user of the financials will all kinds of additional information on the entities investments (some of which will be beneficial).

[kapkomet]

Well, SFAS 157 was a more advanced version of 107 (I believe that is what it replaced at least). Irregardless, it came out about 7 years after SOXso they really weren't related. Unless we are going to say every new guidance that has came out since SOX was because of SOX.

 

 

I probably have my stuff mixed up but there was a SFAS that came out around 2002/2003 about FMV that effected all the financial institutions that changed 107 and then was modified into SFAS 157 in late 2006/2007 IIRC which is IMO what led to a lot of the liquidity issues that started the ball rolling on the house of cards that was the asset base at the time.

[Chisoxfn]

I probably have my stuff mixed up but there was a SFAS that came out around 2002/2003 about FMV that effected all the financial institutions that changed 107 and then was modified into SFAS 157 in late 2006/2007 IIRC which is IMO what led to a lot of the liquidity issues that started the ball rolling on the house of cards that was the asset base at the time.

I think you are thinking of 133 which came out. One of the big focal points of 133 was related to the valuation and bifurcation of embedded derivatives (as well as other issues related to accounting for derivatives). The thing was a royal pain in the ass. In fact, it still is. Been working through an embedded derivative issue on a new product my client will be launching.