Have Banks Tightened Lending Too Much?

When I tell people I meet for the first time that I am a mortgage broker, often their next question is “So, are the banks even lending to anyone these days?”  I always counter with, “Yes, but it isn’t like it was four or five years ago.  You have to be able to prove your income and assets now.”

The general perception is that banks are holding on tight to their money rather than lending it out.  Clearly, people are getting loans to purchase homes and refinance.  However in most cases, obtaining a loan is a minefield that must be navigated cautiously.  You just never know these days what a lender is going to ask for, what arbitrary guideline they may decide to implement – or what senseless interpretation of a rule they are going to abide by strictly.

I admit, I am writing this post out of frustration.  As most people know, fixed mortgage rates are at all-time lows.  Many are refinancing, sometimes for the second or third time in the past couple years.  But in response to past lender abuses, called loan-flipping (where a lender refinances the same borrower time and again with no clear benefit to the borrower), there is now increased vigilance to be sure that a refinance transaction actually benefits the borrower.  This is great.  What isn’t so great is the arbitrariness some lenders now impose.

Let me give an example.  A borrower, who currently makes a mortgage payment with a steep monthly mortgage insurance amount, wants to take advantage of the even lower interest rates since he last refinanced, and no longer wants to throw $350 a month away toward mortgage insurance.  On the new loan his interest rate will not change, but he will be able to eliminate his monthly mortgage insurance payment without needing to bring tens of thousands of dollars to pay down his balance.

Sounds like a great deal, right?  It is if you can find a lender to do it.  Some lenders impose an interest rate change of at least 0.25%.  Others require a 5% drop in the principal and interest payment.  In this example, the borrower’s principal and interest payment is decreasing only slightly, but he is saving over $350 a month by eliminating the mortgage insurance from his payment.

It took a while, but eventually this client was able to refinance, finding a bank willing to use common sense and not an arbitrarily written rule.  The borrower is clearly benefiting and saving hundreds of dollars a month.