Refinancing underwater jumbo loans hopeless for most

Homeowners feeling alienated

Although there are slight hints that housing has been flirting with the bottom and may begin its painfully slow recovery, there are some groups of homeowners that are feeling alienated as waves of supposed relief hit the market in the form of the historic $25 billion mortgage settlement and other settlements trickling in by the week.

The San Francisco Chronicle reports that refinancing underwater jumbo loans has become nearly impossible. Carolyn Said at the Chronicle interviews a frustrated San Francisco family. “The four-bedroom split-level they bought for $799,000 has plunged in value to $566,000 – and they owe $648,000. … The couple, who have perfect credit, don’t want to blemish it by walking away from the house or doing a short sale.”

Trapped in a high rate mortgage

Said notes that “they’re trapped in a mortgage with a 6.375 interest rate – sky-high compared with current rates, which average 3.7 percent – and they can’t refinance because their house is underwater and their jumbo mortgage is excluded from government plans for underwater refis.”

The homeowner tells The Chronicle, “It makes me sick when I think about it. We could save between $800 and $1,200 a month.”

Four options available, few are reasonable

Bill McBride at the CalculatedRiskBlog.com said that since their loan is from a private lender, they have four options. In McBride’s words:

1. Walk away (they can afford the payments and don’t want to walk away)
2. Try to talk the lender into refinancing (good luck)
3. Pay down the loan in one lump sum enough to refinance
4. Try to pay more each month and get the loan balance down

Draining savings and retirement accounts

Said reports on a couple who tried the third option offered above, buying their home in 2005 for just over $1 million with a seven-year adjustable rate mortgage, and when they went to refinance late last year, the home appraised at $730,000. They still owed $834,000. The couple resorted to taking $140,000 out of their retirement and savings to pay down the mortgage enough to refinance into a 30-year fixed rate mortgage at 4.25 percent.

“We felt we were up against the wall,” the woman told The Chronicle. Refinancing “would bring our interest rate down and save a lot of money over the life of the loan. It was a hard decision but we made the financial calculation that it was worth it.”

Even homeowners with perfect credit and perfect payment history are feeling alienated, as the mortgage settlements are not tailored to reach them, nor is any plan, and the assumption by the masses tends to be that if they had such a big loan, they probably have the money to cough up a lump sum, which is not necessarily true. For now, underwater jumbo loans are stuck underwater, as more homeowners are reporting their options for refinancing are slim to none.