With mortgage rates at 25-year lows, refinancing applications have reached record levels in the last two months. But homeowners who bought during the boom years are getting squeezed out of refinancing because the value of their home has plummeted.
"I tried to refi but they won't give me a new mortgage because I bought at the peak of the market and my house has depreciated," says Connecticut homeowner James McCusker. "I don't have the 20 percent equity in the house I need. When they turned me down, they said to me to qualify for any government-related loan program, I need to lose my job."
McCusker, a public relations executive, and his wife, a school teacher bought their home in July of 2005 for $462,500 with a 30 year fixed loan at 6.3 percent.
But today, the home has a value today of $433,000. "We have good jobs, never missed a mortgage payment, "says McCusker. "But I can't get any help. There's something wrong with that."
Industry experts see McCusker's problem as a continuing sign of the skidding real estate industry.
Symptom of the Times
"It's a symptom of the times and it's mushrooming," says Greg McBride, a senior analyst for Bankrate.com, of the difficulty people have refinancing. "It's a bigger problem now than three months ago, and it was growing problem then."
The problem is particularly acute for people who bought a few years ago, when housing prices were skyrocketing.
"People could buy a house with no money down," McBride says. "They were borrowing with the equity from home prices. But with foreclosures and a falling economy, home prices fell and the music stopped."
Calculators and Advice from Bankrate.com:
"For those that bought a home in the last couple of years, it's a difficult time to refinance," says Jon Paukovich, Vice President of Mortgage Lending at Ent Federal Credit Union in Colorado Springs, Colorado. "We have seen borrowers who have not been able to finance because of how far property values have declined."
Paukovich says his firm handled some $30 million in refinancing in January, and the main reason for rejecting a loan is loss of home equity. "We only turn down about 25 percent of the applicants," says Paukovich, "And the main reason is property values."
Luigi Rosablanca is a New York real estate lawyer who says middle-income homeowners are getting hit hard when it comes to refinancing. "We are in a situation right now that if you really need help, you can get it," says Rosablanca. "But if you're in the middle you can't. The assistance should be across the board for refinancing."
For homeowners, many lenders don't have an incentive to refinance a home that's valued lower than the original price. "Unfortunately, we run into that a lot," says Steve Habetz, CEO of Threshold Mortgage. "People call us to refinance that don't have enough equity and we have to say no. We try our best, but you can't force a bank to refinance them."
In the boom times of real estate, home appraisals helped create what some say were higher than actual price values. But now experts say appraisers are taking a different more realistic approach that's actually hurting some refinancing. "My own opinion is that appraisers were under pressure to submit higher prices," says Ent Credit Union's Paukovich. "But now appraisers are more conservative. The purchasers of the mortgages want them to be conservative and much more thorough."
Threshold Mortgage's Habetz agrees that appraisers are more cautious. "They have a lot less stress," says Habetz. "Home prices are stabilizing somewhat but not going up. Right now there's great fear for everyone when it comes to home prices."
Loan To Value
McCusker paid 9 percent down to buy his home. He says he just didn't have the $95,000 to make it 20 percent down, but he had some hope the house would increase in value. "The mortgage broker told us that the way homes were appreciating, we would reach 20 percent equity in a couple of years and we should refi at that point," says McCusker. "Thing is, the house never appreciated to bring us to that point. In fact, it went in the opposite direction."
To refinance, McCusker had hoped to use the 20 percent equity in his home as a down payment, but he now faces a housing market that puts his current mortgage in a financial hole. "I pay about $2,900 a month for my mortgage," says McCusker. "But with the house worth some $30,000 less, if the definition of being underwater is that the mortgage value is more than the value of the house, I am underwater."
Bankrate's McBride says 20 percent down will give you the best terms for refinancing. But anything less is pretty much a gamble for lenders. "For now, homeowners are stuck," says McBride. "I think one thing that would be nice to see, is a government program designed to facilitate refinancing for people that have been current on their loans for at least two years."
As for someone like McCusker, the advice ranges from eventually you'll find a lender to just sit tight and ride out the financial storm. "Shop around," says lawyer Rosablanca. "There are wonderful banking opportunities. One of the good affects of this current situation is that the folks that were not true professionals are now mostly out of the business."
"It would be difficult for a lender to take on that loan," says Threshold's Habetz. "He doesn't have much of an option." "Each lender approaching this in a different manner. They’re playing it like a poker game. From their stand point, they don’t want to do anything." For more stories from CNBC, go to cnbc.com.