Responsible Homeowners Left in the Cold

Another cruel irony of the housing bust? While hundreds of thousands of mortgage borrowers have been able to squat in their homes without making a single mortgage payment in months or even years, many responsible homeowners who have good credit and consistently meet their monthly obligations haven’t been able to refinance in order to avoid losing their homes.

Many of today’s homeowners purchased their homes during a time of easy credit, when mortgage products, like interest-only loans and option adjustable-rate mortgages were issued to the marginally qualified. And many were told that — if they made their payments faithfully — they could easily refinance out of these products into affordable fixed-rate loans once the payments started to balloon.

But that day has never come for some borrowers — no matter how good their payment record or credit score.

Many lenders are refusing to refinance underwater mortgages — loans that are higher than the value of the home — because it would mean big losses for them if the borrower defaults.

According to data submitted to federal regulators and analyzed by the Wall Street Journal, nearly 27% of mortgage applicants were denied mortgages in 2010, up from 23.5% a year earlier.

The cruelest twist? Lenders typically wait until a homeowner is in default before they are willing to modify their mortgage.

For some homeowners, the clock is ticking. In 2011, $1 trillion in adjustable rate mortgages are scheduled to reset. And many are scrambling to refinance their mortgages while rates are still low — to no avail.

Senator Barbara Boxer (D-Calif) has co-sponsored a bill, the “Helping Responsible Homeowners Act,” for borrowers who want to refinance but are in “negative equity,” owing more on their mortgages than their homes are worth.

Boxer’s legislation also requires banks to offer interest rates comparable to what they’re giving to borrowers who are not underwater. And it bans risk-based fees for mortgages issued by Fannie Mae or Freddie Mac that can be as much as 2% of the loan principal.

Now, President Obama is pushing his revised HARP program. The mortgage non-sense just never seems to end. Stay tuned, we’ll keep you updated on these programs.