As I write this post, Fed Chairman Ben Bernanke is before the Financial Services committee of the House for the Semiannual Monetary Report to Congress.
From his prepared testimony:
"…the ongoing weakness in home values is holding down household wealth and weighing on consumer sentiment."
This is why I feel so strongly that the Home Affordable Refinance program (HARP) should not require appraisal for borrowers who qualify based on credit, income and employment. The home is already depreciated, why not allow the homeowner to reduce their mortgage payment and possibly prevent a foreclosure?
Case in point, one of my clients in Federal Way contacted me to refinance their home. They are being relocated out of state and are converting their existing home to a rental since selling it right now is not an option. They have a 5/1 ARM (set to adjust in 13 months) and are interested in a 7/1 ARM as they do not plan on retaining the home beyond 7 years. Their mortgage is securitized by Fannie Mae so they qualify for a Home Affordable refi which provides them a lower rate and allows higher loan-to-values (lower appraised values) for an investment property. With this proposed refinance, they are going to reduce their monthly mortgage payment by $389! That's more money in the economy and helps this family manage having a rental with their relocation scenario….then we receive the appraisal which comes in lower than anticipated.
Now my clients options are to (1) bring in cash to closing by reducing the loan amount to 95% of the appraised value (what's allowed with a HARP refi for investment properties) or (2) cancel the transaction. They elect to cancel. It just doesn't make sense to invest more in the home with the relocation especially with the timing of the relocation.
More from Bernanke's prepared testimony:
"Mortgage interest rates are near record lows, but access to mortgage credit continues to be constrained. Also, many potential homebuyers remain concerned about buying into a falling market, as weak demand for homes, the substantial backlog of vacant properties for sale, and the high proportion of distressed sales are keeping downward pressure on house prices."
Allowing Home Affordable refi's to be more like an FHA Streamline refinance by not requiring an appraisal would also help stabilize home values by preventing additional homes from becoming distressed.
These are highly qualified borrowers who want to keep their property (would prefer to sell but cannot) and who want to take advantage of low mortgage rates. It makes no sense to me that appraised values are factored in when the rest of transaction is strong.
This is a solution that could really help our housing recover.