Mortgage Q&A: Borrowers stymied by daffy rules

A few weeks ago, I reported that the Federal Reserve’s economic summit revealed little about the continuing efforts it would make to further support our lagging economy. Chairman Ben S. Bernanke has made clear the Fed’s intention to keep interest rates low.

Here’s a recap of what the Fed has done so far and what it may do:

• Keep short-term interest rates near zero percent. Long-term interest rates are governed by market forces, but lowering short-term rates often brings down longer-term rates, including mortgages.
• Two rounds of “quantitative easing.” During “QE1” and “QE2,” the Fed purchased billions in long-term debt in the open market, effectively turning the Fed into a giant customer of long-term bonds and mortgage-backed securities. It is hoped that the law of supply and demand will kick in. When there is a brisk demand for a product, such as the Fed’s demand for these instruments, the price will go up and the yield will fall.
• Operation Twist. The Fed last engaged in this trick in 1961 and may revive it, although there’s been no formal announcement. Operation Twist is the practice of rearranging the Fed’s portfolio. Specifically, the Fed purchases long-term debt and sells short-term debt. In theory, this should lower long-term rates and raise short-term rates. Economists tend to agree Operation Twist was moderately successful in 1961.

Pushing mortgage rates even lower than the current levels may indeed help the economy. But I can tell you with absolute certainly, as an owner of a mortgage company for 20 years and having been in the trenches every day with American consumers, the problem is not that interest rates are too high.

The credit standards set forth by mortgage giants Fannie Mae and Freddie Mac are so over-the-top restrictive that millions of homeowners can’t do what the Fed wants them to do: refinance to a lower rate and save some money that then can be pumped back into the economy.

We are indeed getting all our refinances to closing, but not without fulfilling conditions that any reasonable person would consider laughable. Here are a few examples off the top of my head. Remember, all of my borrowers have excellent credit, good income, lots of savings and sufficient equity in their homes.

• A disabled veteran with a prosthetic leg provides his tax returns, which indicate his disability income. The underwriter wants proof his disability income will continue for at least three more years. What, does she think he’s going to grow a new leg?
• A refinance settlement was canceled the night before because the lender realized the appraisal inspection had taken place before Hurricane Irene, which blew past the District. We had to wait seven days for another appraiser to drive by the property and report it hadn’t been flooded. Apparently, the underwriter didn’t care that the property was on the third floor of a brick-and-block condominium complex located on very high ground in Northwest Washington.
• An underwriter requested a letter of explanation and evidence of source of funds for an unknown deposit on a borrower’s bank statement. She wanted to make sure the deposit didn’t come from borrowed money, such as a credit card cash advance. The fact that the deposit was just for $1,200 didn’t matter. It also didn’t matter that the well-qualified borrower was refinancing a $400,000 loan secured against a property worth more than $800,000. Without the explanation letter and proof of source for the deposit, she wasn’t going to approve the application.

Various politicians and talking heads on television are beginning to acknowledge this very real weak link in the credit markets. Let’s hope common sense will prevail soon.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.