Why Won't My Mortgage Refinance Go Through?
May 19, 2003, Reviewed July 2, 2007
"I filled out all the forms to refinance my loan, paid the $350 lock-in
fee, provided all the documents they asked for...But it is now 4 months
and still it hasn't closed...Periodically I call the person in charge of
my refinancing, and he says he will get back to me, and he never
does...What do you think could be the problem?"
Lenders Under Pressure May Give Lowest Priority to Existing Clients
The problem is that you are trying to refinance with the lender who has
your existing loan. All lenders are under pressure trying to process the
unprecedented volume of refinances. They have to set priorities. Yours
is low because your lender already has your loan.
I have written before about the hazards of refinancing with your current
lender, but the hazard you raise has only recently appeared in my
mailbox. It has impelled me to set down in a more organized way the pros
and cons of refinancing with your current lender.
The Pros of Refinancing With Your Existing Lender
Perhaps the major reason people approach their current lender is that it
is convenient. They are spared having to decide who and where to shop.
If their payment record has been good, furthermore, their existing
lender has immediate access to their record, where other lenders would
have to investigate. There is comfort in "being known", and a belief
that this should earn them special treatment.
There is some validity to this belief. The current lender – defined as
the firm to which you now remit your payments -- may be in a position to
offer lower settlement costs than a new lender. How much lower, however,
can vary from case to case.
The greatest potential for lower settlement costs arises where the
current lender was the originating lender and still owns the loan, a
common situation with loans made by banks and savings and loan
associations. If the payment record has been good, the current lender
may forgo a credit report, property appraisal, title search and other
risk control procedures that are otherwise mandatory on new loans. This
is strictly up to the lender.
If the current lender was the original lender but later sold the loan
and is now servicing it for the owner, the potential for lower
settlement costs is less. A lender servicing for others must follow the
guidelines set down by the owner. If the owner is one of the Federal
secondary market agencies, Fannie Mae or Freddie Mac, the guidelines are
theirs. While both agencies have provisions for "streamlined refinancing
documentation", the discretion granted the lender, and therefore the
potential cost savings, is quite limited.
The potential for lower settlement costs is least when the current
lender was not the originating lender and is not the current owner. This
is a fairly common situation that arises when the contract to service
the loan is sold. In this case, the lender may not be in a position to
use all of the streamlined refinancing procedures because its files do
not contain some of the information those procedures require, such as
the original appraisal report.
The Cons of Refinancing With Your Existing Lender
The major argument against refinancing with your current lender is that
that lender may not give you the market price. It will try to minimize
its loss by taking advantage of your preference for staying put, and
your reluctance to shop the market. Any settlement cost benefits your
current lender can offer that other lenders cannot may serve to draw
attention away from the fact that the rate and points offered are not
competitive
Above-market offers are especially likely if the lender takes the
initiative in soliciting its own customers. Lenders who do that are
likely to base their offer on the borrower's existing rate. For example,
in a 5% market, the borrower with a 7% mortgage might be offered 6%
while a borrower with a 6% mortgage (but who is otherwise identical)
might be offered 5.5%. The objective is to provide a saving over the
existing loan that is attractive enough to discourage the borrower from
looking elsewhere. This way, the lender gives up as little as possible.
The unfortunate borrower who wrote the letter above points up an even
greater hazard: the borrower dealing with his current lender may get the
run-around because that lender has no interest in completing the deal.
Why rush to convert a 7% loan into a 5.5% loan? Charging a lock fee and
then letting the borrower dangle is particularly vicious.
The Preferred Strategy
I advise borrowers to 1. Find out the settlement cost savings their
existing lender can offer them; 2. Find their market price by shopping
elsewhere; 3. Shop their existing lender last.