As house prices fall, refinancing becomes more difficult

While lower mortgage interest rates might help some Americans refinance their home loans, Northern San Joaquin Valley homeowners are finding it more difficult because house values have plummeted.

"If your current home value is less than your outstanding loan, you're dead meat," warned Paul Carroll, president of Carrollton Mortgage Co. in Modesto.

Unfortunately, Carroll said, that's the case for many homeowners who are desperate to refinance their high-interest rate mortgages.

Home values have been tumbling throughout Stanislaus, San Joaquin and Merced counties for two years, so homeowners who bought houses with little money down or refinanced during the last four years often have no equity.

"There are lots of people with excellent credit who cannot refinance because they are upside-down on their mortgage," agreed George Erbele, branch manager for Affiliated Mortgage Partners in Modesto.

Erbele's example: A northeast Modesto house appraised for $585,000 about 20 months ago, and the homeowner took out a $414,000 adjustable-rate loan based on that value.

"Now, the home's appraisal is coming in at $375,000," Erbele said. That $210,000 drop was about 36 percent of the value. Since the home is worth less than what is owed on it, Erbele said there are few ways to refinance the loan.

One Oakdale company has come up with a way to help some homeowners in that situation, said John Nelson, branch manager for Nor-Cal Lending, a division of Megastar Financial Corp.

Nelson said he sometimes can refinance a home's high-rate adjustable first mortgage to a better fixed-rate amount, but only if the holder of the home's existing second mortgage agrees to the switch. He said that worked for one couple recently, and they now owe 118 percent of their home's value to two lenders.

"Any lender can do this kind of loan," Nelson said, "but they don't know how to."

It's getter ever harder to refinance in the Northern San Joaquin Valley, however, because the Federal National Mortgage Association (Fannie Mae) has designated this region as a "declining market."

Because of that, Fannie Mae -- which buys mortgages from lenders -- has reduced its permitted loan-to-value ratio by 5 percent.

So, homeowners who used to be allowed to borrow up to 95 percent of their homes' value now can't borrow more than 90 percent. The new restriction took effect for mortgage applications filed after Jan. 15.

Few lenders are willing to issue mortgages that don't conform with Fannie Mae requirements.

That's a huge switch from a couple of years ago, Erbele said, when some second-mortgage lenders would allow homeowners to borrow up to 120 percent of a house's appraised value.

Such no-money-down loans -- and many other exotic mortgages -- have disappeared, and lending rules have become much more strict.

"Every week, there's another lender that comes out with new protective guidelines for loans," Nelson said.

Carroll, who has been in the mortgage business 27 years, agreed: "Lenders have just flat tightened up on what they're approving."

For instance, there used to be "Option ARMs" that let homeowners dramatically reduce their mortgage payments during the early years of the loan, but after that, the adjustable interest rate would soar.

"Those Option ARMs are putting more seniors out of their homes than you can shake a stick at," said Carroll, who contends many homeowners didn't understand what they were agreeing to. "I've got a case with a homeowner in Newman that would make you cry."