Bah Humbug: Refinancing, Debt & Bankruptcy

I cannot remember a worse week in my mortgage business. For all the bad news I will reference below, I hope you can find a valuable lesson. These clients have forced themselves into difficult financial situations—overwhelming and multiple debts, including tax arrears, collections, and more.   When we are employed, paid well, and live accordingly, there should be no serious financial problems.  However, what if a job ends unexpectedly, or some other unforeseen issue occurs?  In all cases, the key is to continue to “live accordingly,” which may include adjusting your lifestyle.

Generally, when in trouble, people look to the equity in their current home for a financial solution.  It sounds easy: consolidate debt, lower payments, and suddenly, you can afford to pay off your debts, and maybe even live a little. 

The gap in the above scenario is our weak economy; by association, the drop in real estate values.   A refinance is only possible when there is enough value in the property to pay off a large sum of your debts plus other incurring fees.  This week, I have had four clients declined a mortgage because their debts have so severely outweighed the property value; therefore, the only advice I can give is to either try and sell, ask for help from family members, or go bankrupt.  The latter is an especially dark and dismal option that I hate to offer up, but unfortunately, may be the only way to escape from a world consumed by debt.

Economy & Mood

Recently I encountered a stark reality in the mortgage business.  I reviewed in June 2011, the profile of a couple who came to me for a mortgage.  Their situation was quite financially weak, which made them unable to get a mortgage approval at that time.  There was a gifted downpayment, a serious past credit issue, and generally limited credit scores. 

I suggested that they wait at least a few months before buying.  This advice was based on the advice of the lenders and the insurers who make the ultimate decision if a person can qualify or not.  Again, they first came to me in June, and this September they returned.  What they didn’t know was that the industry has changed.

The lenders and insurers moods have changed due to the economy:  Greece is near bankruptcy and unemployment has not improved in North America.  Those same lenders who were encouraging in June changed their minds and became discouraging in September.  The emotional part for me is, I based my advice on June’s predictions, when I encouraged the couple their deal might work.  Guess who is the bad guy now?

 I feel for people whose deals fall through, but thankfully, that doesn’t happen very often.  However, the mortgage industry is forever changing, and seems to be changing more rapidly every day.  This is not a good thing for people with poor credit and weak finances.

Economic Worries and Mortgages

One of the most confusing times for everyone in the financial industry is when the economy is seen as fragile. The deficits in the U.S, Britain, Western Europe, and even Canada make investors very nervous. Today, following the economic debate between the U.S political parties on how to manage debt has caused the bond market prices to drop.

Mortgages come from investors wishing to place their money in these markets. If there is concern over the risk, this can or could affect how much money is available. We certainly have seen rates affected, pushing them lower. So we have a conflict; competition for money and rate. This, of course, is a good news bad news scenario. There may be fewer home buyers but rates are lower. Desperate mortgage brokers and agents may try to increase business by lowering rates. This creates frustration throughout the industry when people feel their broker agent is not getting the lowest rates. The problem is that the slightly higher rate can come from the best and most secure lenders who provide great product flexibility.

Rate is not always the solution. When a broker agent buys your rate down, sooner or later they may feel cheated and provide you with poorer service. Beware of low rates for low rate sake.

Lender Industry Mood

Many times you can plan your lives and actions based on the economy. When there is a strong economy, that usually means jobs are plentiful and we can feel secure in buying commodities like homes, etc. Of course, the opposite is true and you should be careful during a poor and insecure economy.

We have an interesting time now in our country when considering the above. Canada’s economy is strong and the envy of the world, yet overall the global economy is in trouble. The U.S, Ireland, Greece, Italy, Spain, etc. all are experiencing huge debt and economic challenges. How does this affect us? Well, since we depend on exports to the rest of the world, it might be wise to tread carefully if you choose to buy a home. Lenders will demand more income proof. Their mood is also cautious and that means you’ll be asked to provide whatever they want and if you don’t, you will find out how cranky they can be. Income proof such as employment letters, paystubs, T-4’s, and Notices of Assessment are important and generally asked for.

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