Yesterday I asked Who is benefiting from soaring refis?

Here were my conclusions:

Do not expect to see as many refis as when home prices were rising. Refis will be hampered by people being underwater on their mortgages, unemployment rising, and credit card defaults rising. All three of those will have a negative effect on FICO scores at a time when refis are going to require better FICO scores.

Most importantly, those who most need to refinance will not find it so easy, especially if they are upside down on their mortgage or out of a job. Refinance relief and lower mortgage rates are starting to become available, but only for those who least need it.

Are Refis Really Soaring?

In response to the above post, Michael J. Dorff at Trans World Financial emailed me wondering if huge numbers of refis are really occurring. Michael Writes:

I think the reported numbers are suspect. There are so many applications that get turned down today it is not funny. The reasons are:

  • applicants cannot document sufficient income
  • loan to value ratios are too high
  • credit scores are not high enough

Number 2 is playing a huge role right now because all lenders have now cut the LTV by 5% in any declining area that Freddie or Fannie recognizes. This alone shuts out nearly everyone who bought in California in the last 3 yrs who did 90% financing or more.

Most of my clients all have rates in the low 5% range. So who is refinancing?

I attached Freddie Mac list of declining area’s for you to see. That list is changing all the time.

California will collapse hard over the next 3 to 4 yrs. All the first time home buyer areas are facing foreclosures bigger than any time in history. The high end areas are going to get killed next, especially when all the Neg Am Loans start to reset.

Michael J. Dorff
Trans World Financial

Thanks Michael. Your feedback is much appreciated.

Freddie Mac California Declining Areas

Click on chart for sharper image
Click here for declining areas file for all states.

California Summary

  • 19 distressed counties
  • 13 soft counties
  • 3 severely distressed counties

Florida Summary

  • 17 distressed counties
  • 21 soft counties

Virginia Summary

15 distressed counties
8 soft counties

California, Florida, and Virginia were the worst three states. Next on the list were Georgia, Michigan, and Ohio.

Comments From CalculatedRisk

I spoke with my friend CalculatedRisk about refis. He cautioned me about the MBA Application Index as follows: “The big problem with the number is that people are getting turned down multiple times hoping to land a better rate. Each time they apply for an application the counter goes up.

While applications may be soaring, applications are not proof that actual refis are soaring. Make a mental note that this is just another part of the Asymmetrical Unwind of the Credit Bubble.

The increasing desperation to refinance at a better rate does not imply actual success in refinancing. While some may be benefiting from the recent decline in rates, those who need it most are probably not benefiting much. Looking at the chart above, the implications are ominous for California.

Mike “Mish” Shedlock
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