My 1st Million At 33 - yes, you can do it too

Many people in California and other high cost living area has been waiting for the interest rate gap between jumbo loans and conforming loans to close. The interest rate gap is about 0.5% to 1.5%. However, it is very unlikely that the gap can go down to 0%.

The biggest unintended consequences that I am seeing for waiting on jumbo loan interest rates is that housing values are going down very fast for people who plan to refinance during their wait. Probably very few politicians are paying attention to this level of details. Unfortunately I think this has turned out to be a BIG TRAP for people who want to refinance.

I myself have already refinanced in the first quarter of this year, in fact, locking my loan earlier due to home valuation concerns. My original healthy LTV at 70% has turned into only 80% LTV (or higher). Fortunately, it didn’t change my interest rate. When the values of the home goes down, and you want to refinance, you MUST put up additional collateral, or cash. But for most people, refinancing was like withdrawing cash from home ATM, instead of the other way around, putting up cash for more collateral. And obviously, this is just not going to work.

Here is a simple example of how it may hurt people who want to refinance:
Let’s say someone bought a home in 2005, and put up only 5% down payment. Even though home values have gone down recently, he probably has not lost any money yet. The values appear to only have gone down to 2005 valuation. The only problem is that when he tries to refinance the loan, he may be required to put up 20%, or at least 10% instead of 5% that he did. This amount of cash can be roughly $30K to $90K for a $600K home for putting up 5% to 15% additional. If he doesn’t have any cash, or enough cash, there won’t be any refinancing deal. In fact, it may be better for him to keep his original mortgage because probably very few lenders will be willing to lend out 95% value for a home.

So what’s going to happen to the people who have to refinance, but can’t. There are probably just two outcomes:
1. They don’t refinance, but stay in the same loan which is going to reset on them with much higher monthly payment. The much higher monthly payment is probably going to drain all of their financial resources. Economy takes an ongoing hit due to them spending less on non-housing items.
2. They go into foreclosures due to the inability to refinance. This will further drag down the housing valuation, and continue the negative vicious cycle in housing market.

If one turns the clocks backward by 1 year, one may be able to squeeze thru the home valuation by simply getting a dishonest appraiser and willing lender. But there are no longer any willing lenders. All lenders as far as I know have strictly followed the home valuation/appraisal step. They can no longer afford to take huge losses when the home value which is supposed to be collateral itself cannot sell even for 70% of its value in foreclosure.

I hope you didn’t get into the traps. If you did, I can only advise you to put up more cash, or get into any of those neg option ARM or anything that you can afford on a monthly payment basis as soon as possible. Windows are closing. Bank of America & Countrywide has recently decided that they will no longer do low-doc and neg ARM loans in the future.