Mortgage rates hit stunning new lows last week, falling below 5 percent for the first time in decades. The stampede of refinance applications triggered when rates first starting tumbling in early December continues apace.
But the good news comes with a big caveat. Many applicants -- even ones with good jobs and credit scores -- are getting turned down altogether or are unable to land the best rates.
"Everybody wants to refinance, and nobody qualifies," said Marc Savoy, a mortgage broker with Pacific Mortgage Consultants in Larkspur, Calif.
That's a slight exaggeration -- in fact a quarter of the people who come to Savoy do qualify, he said.
As has been the case for months, only borrowers with stellar credit, documented income and equity are seen as desirable. That means that struggling homeowners who face the prospect of foreclosure are completely shut out.
"If you have one mortgage (payment) late, I can't even touch you, so forget about (someone who's close to) foreclosure," Savoy said.
But even otherwise well-qualified people are finding obstacles because of the plunge in home prices.
Most of the mortgage boom is in refinance applications, not home purchases. As values fall, many homeowners find that they suddenly don't have enough equity for a refinance.
"Home values have dropped so extraordinarily low that it's taken people out of the game," Savoy said. "Lenders chart a premium based on how much equity you have. If you start climbing above 80 percent equity, they charge you for it, making it so expensive that it's not worth it to refinance."
The Federal Reserve's promise to purchase mortgage-backed securities brought down rates -- which lured prospective borrowers.
The Mortgage Bankers Association said that mortgage applications for the week ended Jan. 9 were the highest since June 2003, and were up 52.4 percent compared with the same week last year.
Bill Meeker of Fremont, Calif. is one of those getting crunched by falling home values. He has a steady job as a CPA for a Fortune 500 company, excellent credit, equity in his home -- and he only needs a conforming loan of under $417,000. But while his equity was once 20 percent, as home values have sunk, it has dropped to about 10 percent. Lenders tell him that's not enough to qualify for a refinance, so they are turning him down or requiring that he pony up extra money for pricey mortgage insurance, he said.
"No lender will allow me to refinance without mortgage insurance or bringing a ton of cash to the table," he said. "Many simply refuse to work with me, including my current lender."
Meeker is taken aback by being seen as an undesirable lending prospect.
"I'm one of the good guys," he said. "I pay on time; I didn't get in over my head. I'm not responsible for this temporary drop in real estate prices. I'm sure there are a lot of people in my boat so I find it surprising that lenders won't work with us."
Guy Cecala of Inside Mortgage Finance in Bethesda, Md., said that another hurdle, even for those with plenty of equity, is trying to take out cash in a refinance. Homeowners with existing home equity lines of credit, even if they don't want to borrow any more money, are treated as cash-out refis and seen as less desirable, he said.
"For example, if you have a $300,000 mortgage and a $100,000 line of credit and your house is worth $700,000, you've got plenty of equity," he said. "But paying off both of those and getting a new mortgage would be treated as a cash-out refi by Fannie Mae and Freddie Mac these days. They penalize cash-out refis."
The safest type of refinance? "Rate-adjustment refis -- refinancing just to get a lower payment."
Cecala advises consumers to shop around.
"It's advantageous to go through a mortgage broker because they can talk to multiple lenders and tell you what the best prices are," he said. "Some brokers can get better rates out of lenders through their wholesale division than you can get through retail" -- going directly to the lender.
But many major lenders have curtailed their use of brokers. JPMorganChase, for instance, said last week it will stop doing business with brokers. The other downside to brokers, he said: "They get better rates but they can add more junk fees.
"There are a lot of potholes," Cecala said. "It's a lot of work to refinance your mortgage these days."
E-mail Carolyn Said at csaid(at)sfchronicle.com.
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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