Why hasn't everyone refinanced?
With interest rates on the rise, 2014 might be the last chance for homeowners who haven't refinanced to take advantage of historically low mortgage rates.
The vanishing opportunity begs the question: why hasn't everyone refinanced?
The answer isn't just one reason. Rather, a collection of demographic traits, loan characteristics and limited refinancing opportunities might explain these homeowners' behavior.
Survey: Who failed at refinancing?
A recent study by Fannie Mae asked 1,322 U.S. adults who had a mortgage whether they'd ever refinanced. The answers:
- Yes: 54 percent
- No: 46 percent
Those who said "no" were then subdivided into two sub-groups:
- I never tried to refinance: 39 percent
- I tried in last two to three years but was unsuccessful: 7 percent
Those who'd tried, but failed tended to be younger, have lower incomes and less education than those who'd succeeded, the study found. Unsuccessful borrowers also had owned their homes for shorter periods and were more likely to be underwater compared with those who'd refinanced. The unsuccessful group also exhibited more financial anxiety and greater pessimism about their financial future than those who'd never tried to refinance.
In a blog post, Li-Ning Huang, senior manager of business strategy, economic and strategic research at Fannie Mae, said the majority of homeowners who were able to refinance had done so after they'd owned their home between six and 15 years.
All the groups had similar perceptions of the pros, cons and complexities of refinancing.
But those who'd tried and failed were also more likely to say they'd have to bring cash to the closing table to refinance. This group also said they weren't qualified to refinance and lenders they'd contacted could not or would not help them do so.
The study was based on Fannie Mae's National Housing Survey. Data was collected from January 2013 to March 2013.
Experts: Why haven't all homeowners refinanced?
Mortgage professionals point to other reasons why some homeowners haven't refinanced.
Fred Arnold, a loan consultant at American Family Funding in Santa Clarita, Calif., says one common barrier is that the homeowner already refinanced and extracted equity, (i.e., cash-out refinance) as part of the new loan.
"The biggest common denominator was people who refinanced in '06, '07 or '08 to do home repairs or take money out for other needs," Arnold says.
Two other "common themes," Arnold notes, are existing "no-doc" loans that didn't require proof of income and "zero-down" loans that were obtained with no down payment. Those loans don't preclude refinancing, but they suggest the homeowners might not be able to qualify for a loan under current guidelines.
No HARP
People "purchased with the expectation that home values were going to go up," Arnold says.
And indeed, home values have recovered in some local markets, but not all. That suggests negative equity is still a barrier for homeowners who owe more than their home is worth and don't have a loan that's guaranteed or insured by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).
Loans that are guaranteed by Fannie Mae or Freddie Mac are eligible for the Home Affordable Refinance Program (HARP), which allows borrowers to refinance without equity, but only if loans were sold to Fannie and Freddie before May 31, 2009.
"There's HARP for Fannie and Freddie, and VA and FHA have a no-appraisal option," says Joe Metzler, a mortgage specialist at Mortgages Unlimited in St. Paul, Minn. But other homeowners are "out of luck."
Gary Parkes, vice president of mortgage lending at Guaranteed Rate in Atlanta, Ga., concurs.
"There's nothing in place to help people who had subprime or non-agency loans. Those people are truly the ones who theoretically need (HARP) the most," he says.
Low appraisals
Rising home prices should help homeowners refinance, but not until appraisals catch up to the higher valuations, Parkes adds.
Appraisers can base their valuations on comparable home sales, or "comps," that occurred as long as six months or even a year ago.
Metzler says property tax assessments haven't caught up to higher home prices either and that could give some homeowners the mistaken impression that they don't have enough equity to refinance outside HARP.
"Don't assume the tax value on the tax statement is fair market value because it's not," he says. "We've seen a big increase (in property values), but that is not reflected in the tax statement yet."