While lower mortgage interest rates might help some Americans refinance their home loans, Northern San Joaquin Valley homeowners are finding it more difficult because house values have plummeted.
"If your current home value is less than your outstanding loan, you're dead meat," warned Paul Carroll, president of Carrollton Mortgage Co. in Modesto.
Unfortunately, Carroll said, that's the case for many homeowners who are desperate to refinance their high-interest rate mortgages.
Home values have been tumbling throughout Stanislaus, San Joaquin and Merced counties for two years, so homeowners who bought houses with little money down or refinanced during the last four years often have no equity.
"There are lots of people with excellent credit who cannot refinance because they are upside-down on their mortgage," agreed George Erbele, branch manager for Affiliated Mortgage Partners in Modesto.
Erbele's example: A northeast Modesto house appraised for $585,000 about 20 months ago, and the homeowner took out a $414,000 adjustable-rate loan based on that value.
"Now, the home's appraisal is coming in at $375,000," Erbele said. That $210,000 drop was about 36 percent of the value. Since the home is worth less than what is owed on it, Erbele said there are few ways to refinance the loan.
One Oakdale company has come up with a way to help some homeowners in that situation, said John Nelson, branch manager for Nor-Cal Lending, a division of Megastar Financial Corp.
Nelson said he sometimes can refinance a home's high-rate adjustable first mortgage to a better fixed-rate amount, but only if the holder of the home's existing second mortgage agrees to the switch. He said that worked for one couple recently, and they now owe 118 percent of their home's value to two lenders.
"Any lender can do this kind of loan," Nelson said, "but they don't know how to."
It's getter ever harder to refinance in the Northern San Joaquin Valley, however, because the Federal National Mortgage Association (Fannie Mae) has designated this region as a "declining market."
Because of that, Fannie Mae -- which buys mortgages from lenders -- has reduced its permitted loan-to-value ratio by 5 percent.
So, homeowners who used to be allowed to borrow up to 95 percent of their homes' value now can't borrow more than 90 percent. The new restriction took effect for mortgage applications filed after Jan. 15.
Few lenders are willing to issue mortgages that don't conform with Fannie Mae requirements.
That's a huge switch from a couple of years ago, Erbele said, when some second-mortgage lenders would allow homeowners to borrow up to 120 percent of a house's appraised value.
Such no-money-down loans -- and many other exotic mortgages -- have disappeared, and lending rules have become much more strict.
"Every week, there's another lender that comes out with new protective guidelines for loans," Nelson said.
Carroll, who has been in the mortgage business 27 years, agreed: "Lenders have just flat tightened up on what they're approving."
For instance, there used to be "Option ARMs" that let homeowners dramatically reduce their mortgage payments during the early years of the loan, but after that, the adjustable interest rate would soar.
"Those Option ARMs are putting more seniors out of their homes than you can shake a stick at," said Carroll, who contends many homeowners didn't understand what they were agreeing to. "I've got a case with a homeowner in Newman that would make you cry."
Carroll said that loan had a 5« percent interest rate for the first three years, then jumped to 8« percent and is headed to 10« percent. Since Newman home values have declined so much since 2005, Carroll said, there are no good refinancing choices for that homeowner.
No-doc loans are gone
Choices also are slim for many borrowers who previously got "no doc" loans that allowed them to simply state how much they earned rather than document their income.
Earnings were inflated on many no doc loan applications -- either by borrowers or by unscrupulous mortgage brokers -- so homeowners were approved for larger mortgages than they could afford, Carroll said.
He cited the case of one elderly couple who earned $1,600 a month but were approved for an adjustable-rate no doc loan that required monthly payments of $1,281.
"They were selling their furniture to make their payments," Carroll said. Since lenders now require most borrowers to fully document their earnings, that couple can't qualify for a new loan.
It's also increasingly difficult for homeowners to qualify for refinancing unless they have good credit.
Carroll said many subprime loans used to be available to those with credit problems, but now loans are hard to find unless credit scores are 680 or above. He said it takes at least a 720 score to get the best rates.
Subprime loans for those with poor credit, however, have virtually disappeared. People with adjustable-rate subprime loans who need to refinance have trouble qualifying for something better.
That poses a bigger problem in the Northern San Joaquin Valley than it does elsewhere in the country because a higher percentage of homeowners here have subprime loans.
In 2006, more than 46 percent of loans in the region were subprime, compared with 27.5 percent nationwide, according to a study by the Association of Community Organizations for Reform Now.
"There's a lot of people who are really stuck," said Erbele, who's been in the mortgage business 19 years. "We probably used to be able to find mortgages for about 95 percent of people who requested loans, ... but now only 10 percent to 15 percent of the refinancing requests get approved."
Those most likely to be approved are homeowners with good credit who can fully document their income, have loans that are at least five years old with balances below $417,000.
That's because those homeowners typically still have equity, and their mortgage amounts don't exceed Fannie Mae loan limits.
Who would benefit?
"People who have loans with interest rates in the high 6s (like above 6.5 percent) probably could benefit from a refinance now," Erbele said.
Homeowners who have 20 percent equity, have credit scores above 720, borrow less than $417,000 and occupy the home probably can get a refinanced 30-year-fixed loan at 5.375 percent to 5.875 percent, Erbele said.
But interest rates are very volatile, Erbele warned, and rates can change several times per day based on fluctuations in the bond market. He said borrowers shouldn't wait for lower rates: "The money is as cheap as we're going to see it."
Good time to buy
While this may be a difficult time for many Northern San Joaquin Valley homeowners to refinance, Carroll said, it's a great time to buy because mortgage interest rates and home prices are relatively low.
Many first-time buyers, Carroll said, can qualify for Federal Housing Administration-backed loans with 5.5 percent interest rates. Those 30-year-fixed-rate loans can be for up to $362,000, and only 3 percent down payments are required.
While the FHA loan limit poses problems for buyers in expensive communities such as those in the Bay Area (median-priced homes sell for $587,500), Stanislaus County's median home price has dropped to $281,250.
"You talk about affordable housing, we've got it," Carroll said. "If people don't buy now, they're going to be sorry. (Home prices) are going to be off to the races again, and then they're going to say: 'We should have bought.' "