The residential real estate markets in many areas of the country are plodding along in high weeds. When that is combined with a home loan industry that is grappling with serious balance sheet tremors, the situation is ripe for healthy head scratching for a homeowner who needs to refinance his explosive mortgage. As if that isn't enough to take a deep breath, there is another new, potentially crippling twist to the scenario.
The refinance process can turn murky, even impossible, if a second mortgage is involved. It usually is subordinate to the 1st loan, so in case of a default the 1st loan is paid off first and what's left goes to satisfy the second. Clearly the second mortgage holder takes a bath if the sales proceeds aren't enough.
So, let's say a homeowner wants to refinance only his 1st, which could be an option ARM about to reset higher, to a lower rate, receives plenty of appraisal to blanket both mortgages and is promptly approved. That's step one. Now, the second is typically with a different lender and it also needs to okay the deal. This is step two. If it doesn't sign off on it, however, the refi is dead, regardless of how sound the fundamentals are. Strange, isn't it?
Why would a lender, National City Corp. is one of them, resort to this? For one, it may fear home values will continue declining which could expose it to a loss. That's understandable because its collateral is in danger. But if the appraisal comes in 10-20% above the two loan balances, then it doesn't make much sense. Yet, refinances have been vetoed under these circumstances. Perhaps the idea is to force the homeowner to refi both mortgages that would then wipe out the potentially risky second loan from its books. And give it added liquidity if its balance sheet is bleeding badly.
For a homeowner, the best route would be to refinance both loans in one shot, so long as the value is there.
The whole idea certainly goes against all the grand talk we hear from Washington and the finance industry that they are helping people stay in their homes.