Headline: Borrowers taking out larger loans at higher rates when refinancing

Source: San Jose Mercury News, 23 June 2001

URL: http://www0.mercurycenter.com/premium/business/realestate/docs/harney23.htm

A startling new study says American homeowners are in the process of rewriting the traditional rules of refinancing: Rather than getting a new mortgage at a lower interest rate, they are taking out larger loans at rates slightly higher than what they were paying before.

After a statistical analysis of recent refinance transactions in a 14 million-loan national database, mortgage market researchers report that the average borrowers in the current refi boom took out loans $41,000 larger and at an interest rate 0.6 of a percentage point higher than they had prior to the refinance.

The study was performed by MGIC Capital Markets Group, a division of Mortgage Guaranty Insurance Corp. (MGIC), the country's largest home loan insurer. Included in the multi-lender database was a representative sample of conventional, FHA-VA and other mortgage refinance transactions from all regions of the country.

Though the findings may seem surprising, MGIC researchers say the study documents that American families increasingly are using home real estate equity to manage other forms of consumer debt -- particularly credit cards, auto loans, department store charges, and second and third mortgages.

Michael Zimmerman, MGIC vice president for mortgage banking strategies, says homeowners are using today's relatively low mortgage rates to consolidate their installment debts into a single, tax-deductible monthly payment. They are ``lowering their overall . . . debt payment,'' he says, even though they ``may actually be taking on a higher-rate first mortgage.'' They are willing to do so because their bottom-line, out-of-pocket cost on the new loan is still considerably less than what they'd be paying on their combined credit card balances, auto loans and assorted other installment debts plus their prior mortgage.

Say you've got $15,000 in credit card debt, a $10,000 car loan, and a $15,000 personal loan. All of that $40,000 in debt is at double-digit rates -- from 12 percent to 18 percent. Say you also have a 7 1/4 percent home mortgage. Under the traditional approach to refinancing, you'd do nothing in the current market. There's just not enough ``spread'' between today's prevailing 7 1/8 percent market and your current rate to justify a refi. But MGIC's new research data suggests that you might look at your situation differently.

With $40,000 in non-tax-deductible, high-cost consumer debt at an average 15 percent rate, you might say to yourself: Why not pay off all of it by ``cashing out'' some of the appreciation our home has racked up in recent years?

After all, we've got an estimated $80,000 worth of inflation-fed equity that we can tap into through a refinancing. Why not get rid of the $40,000 in installment debt by rolling it all into a new first mortgage in the mid-7 percent range? Even if we have to pay 7 1/2 percent or 7 5/8 percent for a no-fee, no-closing-cost deal on the new first mortgage, we're still going to save more than $150 a month out of pocket, and it will be all tax-deductible to boot.

MGIC officials say that consolidating consumer installment debt into home mortgage debt is not what's so striking about the new refi data. Homeowners have been doing that with second and third mortgages and home equity credit lines since Congress prohibited interest deductions on consumer debt -- but not home mortgage debt -- back in 1986.

What's different today is that homeowners are rolling everything -- including higher-rate home equity loans -- into their first mortgage. MGIC researchers say the current refi boom is the first in which a substantial percentage of homeowners were opting for a higher interest rate and even a higher loan-to-home value than they had before the refinance.

Among other findings of the study:

· Nearly two of five borrowers who had private mortgage insurance (PMI) on their loans before refinancing also have it on the replacement loan. In other words, both before and after the refi, they still have less than 20 percent equity in the house. Once borrower equity is below 20 percent, lenders generally insist upon PMI to protect themselves against loss in the event of foreclosure.

· A surprising number of borrowers -- 15 percent -- who weren't paying PMI before refinancing ended up with it after the refinance.

Is hocking your house to the hilt via debt-consolidation refinancing the way to go for you? The traditional advice here would be avoid heavy debt on your home because you could lose your most important asset in an economic downturn. But the logic of looking to the monthly bottom line rather than to your post-refi interest rate is powerful.

If you can pay down your high-cost, non-deductible debts by paying a 1/2 a percentage point or 3/4 percentage point higher interest rate on a larger, tax-deductible first mortgage, why not?

Just don't fall behind on that monthly mortgage payment.

[ << because you could lose your most important asset in an economic downturn >> *That’s* why not. Because your house is your biggest and most important asset. Duh. Look for that many more people to be sleeping in their cars when TSHTF... --Andre]

-- Andre Weltman (aweltman@state.pa.us), June 25, 2001

Answers

Reminds me of a childhood friends Mom who did the exact same thing. Then she LOST the House totally. Ended up in a very poor side of town, impoverished & bankrupt. The Coronels wife went from owning a Bently & Driving Jaguars to walking everywhere & her sons supporting her.. Her son begged her to Not! Refinance the House with all there other debts & to ride out the storm. Its a shame that all these folks will eventually run those CREDIT cards & consumer debt up AGAIN! But they will still have that higher home payment debt stretched out on a 20 or 30 year note. NOT A WISE MOVE @ ALLLL. BEEN THERE & SAW DAT! GENO-CA

-- Geno-ca (headturbo@hotmail.com), June 25, 2001.

[I kid you not, I didn't see this article until long after posting the first one:]

Headline: Home mortgage foreclosures up, expected to rise

Source: USA Today, 25 June 2001

URL: http://www.usatoday.com/money/economy/housing/2001-06-25-home.htm

In another sign of the weakening economy, more debt-laden Americans are losing their homes.

In the first quarter, the number of home mortgages in foreclosure increased 9% to about 142,000, according to Mortgage Information, a San Francisco-based mortgage research firm that tracks a database of about 29 million loans.

The jump is noteworthy because mortgages typically have lower default rates than other loans. When homeowners fall on hard times, they're likely to pay their mortgage before other bills.

In addition, the increase comes as Congress is finalizing a bill that could make it harder to stave off foreclosure in bankruptcy.

Industry experts predict foreclosures will continue to grow in the wake of higher delinquency rates last year. "I would expect the foreclosure numbers would stay higher even after delinquencies start to subside," says Doug Duncan, chief economist at the Mortgage Bankers Association of America.

Another worrisome sign: Mortgages originated last year are going bad sooner than loans taken out in previous years, according to Mortgage Information. And in some metropolitan areas, such as Philadelphia and Atlanta, foreclosures have increased at a faster rate than the rest of the nation.

Several factors can trigger foreclosures, experts say. For example, when homeowners have little or no equity in a home, or when the market value declines, they don't have much to lose if the lender forecloses.

Even with U.S. home values still strong, home equity has declined with the proliferation of home-equity loans and low-down-payment mortgages, according to a study prepared last year by Freddie Mac.

Many US families live from paycheck to paycheck and don't have a cushion when they hit a financial bump. If the economy continues to weaken and layoffs increase, more homeowners could find it hard to keep up.

But in the future, cash-strapped families could find that they can't take advantage of an option for stopping foreclosure and catching up on back mortgage payments — Chapter 13 bankruptcy.

Chapter 13 allows debtors to keep their assets and pay bills over several years. "In some parts of the country, the main reason for filing for Chapter 13 is to save a home," says Henry Hildebrand, a Chapter 13 trustee in Nashville.

But two versions of a bankruptcy reform bill that passed the House and Senate last year could change that. "The bill is filled with provisions which collectively would undermine a debtor's fresh financial start and make Chapter 13 less viable," says Samuel Gerdano, executive director of the American Bankruptcy Institute.

Congressional leaders are attempting to appoint a conference committee that would reconcile the two versions of the bill, but they face opposition from Sen. Paul Wellstone, D-Minn., who has threatened to filibuster the motion.

-- Andre Weltman (aweltman@state.pa.us), June 25, 2001.

So that's what's been propping up mortage interest rates. Mortgage rates usually follow all other interest rates down when there is such a climate, as now. I'd been wondering about it. If this is smart or not, hard to tell.

-- RogerT (rogerT@c-zone.net), June 25, 2001.

Whatever the reasoning, it doesn't seem to be working according to the book. Credit card debt and consumer loans are still exploding.

-- Wellesey (wellesley@freeport.net), June 25, 2001.

The sheer "height" of this debt "pyramid", which renders it unstable and susceptible to collapse (a cascading debt default); may be a large part of the reason why California's energy crisis seems to be abating. (It is possible that hushed but frantic Y2K embedded system remediation may also be playing a part.)

Greenspan, the Federal Reserve Corporation, and other powers that be realize that a California state government insolvency and bankruptcy could topple this "pyramid", resulting in a cascading debt default that would ripple around the world. The dominoes could fall as far away as Japan, Turkey, Brazil, and other countries now on the brink.

Most important politically is the fact that such a cascading debt default would hurt the RICH, who are the same people profiting from the gouging of the State of California. And, the fallout would also put the Democrats - no matter how disastrously bad their nominee - back in power in 2002, which is exactly what happened in 1992. "It's the Economy, stupid."

The bottom line result of the California Energy Crisis now appears to be less infrastructure disruption than expected as recently as a month ago; and more economic fallout. The already high cost of living in California will become outright astronomical, while incomes and jobs shrink. And the "brain drain" exodus from the State of 1992 will be repeated, on an even more massive scale.

-- Robert Riggs (rxr.999@worldnet.att.net), June 25, 2001.

Isn't a 9% jump in mortgage foreclosures rather ominous? I would think, if this strategy -- debt consolidation at a lower interest rate -- were working, such would not be the case.

-- QMan (qman@c-zone.net), June 25, 2001.