Loan to Value Ratio – Refinance Challenge

Home owners trying to get refinance will often come across loan-to-value requirement (LTV). This requirement, either self-imposed or otherwise,  basically limits refinance  to cases where  required loan is less than 85% of current market value of a home.  

For example, if the current value of home is 500K then the loan is limited to 425K. For those home owners who have enough equity then this should be fine. However, there are millions of home owners that bought after 2004  that will not have enough equity. Their LTV can be higher than 85%.  All of those  home owners will face it difficult to  refinance. 

For example,   if a home owner bought  house for 625K in 2004 and paid up 125K so far and has  500K remaining mortgage then that owner  is eligible to refinance upto 425K using the 85% LTV rule.  The remaining 75K has to be paid up at the time of refinance – a tall order given the tough economic situation we are in now. Even 401K balances have halved or evaporated over the last few months to tap into. So it is difficult for home owners to find funds to bring the outstanding loan to a level where it can be refinanced. 

It is important that any payments made by home owners be protected upto 200K by Housing administration of the Fed just like bank deposits are protected by FDIC.  Homeowners can’t be asked to come up with new money to bring LTV below 85%.  It must be made illegal for lenders to refuse refinance under the pretext of  85% LTV rule. 

For instance,  assume mortgage loan amount is 750K on a house originally worth 1Million with the remaining 250K paid by buyer as downpayment.  Further assume that current market value of the house is 700K. This represents 300K loss on the property.  Assuming  the loss is split between the two investors in the house -the home owner and current lender then one has to see what protection/insurance each one has against loss.   In the case of   home owner the insurance/protection  must be upto 200K as provided by FDIC for deposits.  Any loss above that can be passed onto home owner.   Assuming the loss of 300K is split in the ratio of original investment 750K/250K,  home owner has a loss of 100K while the lender has a loss of 200K.   Since home owner is protected upto 200K  home owner gets to keep 200K  of his original downpayment and that is the equity that should be considered at the time of refinance.  Since that is about 28% of current market value of the house he/she more than well qualifies for any standard measure for orginating loan.

 Refinance refusal based on LTV shall be made illegal in cases where current owners have equity on the original purchase price.  This is a country of equal opportunity and fairness. No one shall be denied the opportunity to refinance using the 85% LTV rule. If any thing  Washington lawmakers or individual states like CA should make such rule illegal and force lenders to offer refinance to those home owners who have paid at least 10% based on the initial purchase price.  For those who have not paid as much   FHA loan rules that allow as low as 3% downpayment to obtain loans shall be applied in the refinance case as well.  

Current refinance practices by lenders is outright illegal. Lenders overall over the years have played  with home buyers and they continue to do now.  For weeks lenders sat on the 400B that moved from treasury to FIIs. Now they started lending but seem to limit to selected cases.  Much of the affected home owners from 2003 are not yet seeing the benefit.  People who bought homes prior to that or some  others are getting refi. While they should – the stimulus package was meant to take care of those in need and that is the folks who bought after 2003 -the ones who got trapped in the ponzy scheme perpetrated by vast network of lenders, brokers.  There is no need for blaming any one here as no body undertsood the impact then.  If people were not approved for loans in 2004 we would not have home prices at the levels we have seen and continue to stay at high levels in many markets.