Suddenly, now that the mortgage refinance train is chugging away at warped speed, mortgage lenders are having trouble keeping pace, leaving many borrowers waiting for more than two months.
For years mortgage rates have behaved like a crazy rollercoaster ride at Disney World--taking extreme dips and turns no one saw coming. As rates leveled off and even rose last November, mortgage brokers and financial institutions saw a decrease in overall refinance demand and fired a large chunk of its staff.
Last April Wells Fargo slashed 4,500 employees from its mortgage division and closed several refinance centers throughout the country. The refinance era appeared to be dead and buried until suddenly early fall, it started showing signs of life.
Within the past month, rates took another unexpected dive, which spurned the latest voracious craving for refinance. Now mortgage lenders are trying to process more mortgage loan paperwork with less people.
According to the Mortgage Bankers Association, refinance applications increased a staggering 83% from this year’s low in February to the end of August. The increase comes on the heels of the average 30-year fixed loan rates dropping from 5% to 4.15% in mid August, which is the lowest reported level by Freddie Mac since 1971.
This week the 30 year fixed mortgage rate is now below 4% for the first time ever--hovering at 3.94%.
Why So Much Gridlock?
Many borrowers wonder with the tremendous upgrades in automation, why they have to wait 60 days or more for their refinance to be approved.
Stew Larsen, head of mortgages at Bank of the West (San Francisco, CA) says that no matter how much you try to automate the process it still comes down to people. “The industry has come a long way in terms of automation, but it’s still a people-driven industry. Mortgage insurers, appraisers, and title companies, all those surrounding industries, they downsized as well.”
Larsen adds that the continued focus on stricter underwriting and disclosure requirements has also dragged down the process, which is leaving no room to shorten the process.
Another issue is what does the mortgage lender do during this race to refinance? Hire staff back, only to have to re-furlough employees once this trend cools?
Many mortgage brokers used to hire temporary staff and outsource work during times of loan surges, however this practice is somewhat frowned upon after the robo-signature debacle.
In fact this conundrum may even tinker with economic recovery as the Obama Administration continues to develop plans for a housing recovery. Initial blueprints point to ways to promote refinancing through Freddie Mac and Fannie Mae for underwater borrowers, however mortgage companies are already overloaded with applications. Approximately 11 million U.S. homeowners (23% of Americans with a mortgage) are considered to be underwater.
Should You Wait to Refinance?
As in the past, you’ve got to know when to hold them and know when to fold them. In previous months economists have told us that we’d already seen the best of the rates as rates began to climb to 5%. Now this. What’s a borrower to do?
According to Greg McBride, senior financial analyst for Bankrate.com, borrowers should consider anything at 4.5% or less to be an ideal time to refinance. "When mortgage rates got below 4.5%, that opened the door for people who previously (refinanced) at 5 and 5.25%," he said. "Even at 4.75%, if you can snag a rate below 4, it makes sense."
Today refinancing goals are not completely about lowering mortgage payments. Ken Perlmutter, president of Perl Mortgage says that borrowers have numerous reasons to refinance (or not).
"It depends on what you're trying to accomplish," he explains. “Do you want a lower payment? You want to go to a 30-year. If you're at a different point in your life and you want to accumulate wealth (a 15-year means), you're paying down the principal faster, you're building equity faster."
In fact the 15 year product is more popular than ever, current hanging around the 3.25% mark.
Either way, continuing to wait for lower rates may not be in the borrower’s best interest. Even if, for some reason rates could actually drop again, borrowers will still receive the “deal of the century” with a refinance today.
That’s why mortgage professionals advise borrowers to shop around, pack their patience and wait out the process.
Companies also continue to remind borrowers to have their financial house in order before applying. According to mortgage broker Mark Goldman, credit scores are still a big deal. The best rates will still be awarded to those with credit scores of 720 or more and only approximately 40% of U.S. homeowners have a score that high.
However the 720 score is not set in stone across the country. Mike Anderson, mortgage broker at Essential Mortgage Company in Baton Rouge, LA says that a score of 680 will suffice.
Additionally, you must have 10% to 20% equity in their home, depending upon where you live. Goldman says, “It’s tough to refinance a loan these days. Only the select few can qualify.”