Increases in Rates, Delays on Loans Encountered : Refinancing Fever Turns to Confusion

For Aziz Rastegar, refinancing fever has turned into a headache. The 50-year-old Santa Monica business consultant was elated when he applied in February to refinance his home mortgage down to a 9.5% fixed rate from his current 13%.

But because of various delays, and what he claims was his lender’s failure to tell him when his loan was approved, Rastegar must now accept a 10.5% rate--if he chooses to go ahead with the refinancing at all. “I’m going to wait for the rate to come back down instead,” he said, frustrated.

Recent sharp rises in mortgage rates, combined with major delays in getting mortgages approved and closed, have turned the excitement of seeing the first single-digit mortgage rates in nearly eight years into frustration, confusion and anger for many consumers.

Consumers applying for new mortgages or refinancings are complaining about being helpless to do anything about the rate increases as some loans have remained in escrow as long as five months. Consumers are also complaining about higher fees, not being told of the status of their loan applications and not being able to lock in the lower rates that were in effect when they applied.

Other consumers are canceling their mortgage applications outright, mortgage bankers and some other lenders report. The cancellations, while affecting the purchases of some homes, have particularly hit refinancings, which are taking longer to approve and close than new loans--often because lenders place a lower priority on them.

Homeowners often are canceling refinancing plans because the new higher rates make the savings from refinancing no longer enough to offset origination fees, appraisal fees and other costs of refinancing, lenders said. Also, with the new higher rates, some prospective homeowners no longer qualify for loans.

“For each half-percentage-point rise in mortgage rates, there is a dramatic change in the numbers of people able to qualify,” said Angelo Mozilo, president of Countrywide Funding, a nationwide mortgage banking firm based in Pasadena. “The spike in rates really creates a hardship.”

Consumer Complaints

The California Department of Savings and Loan, which reports a sharp increase in consumer complaints to its office concerning loan processing delays and other problems, is investigating one or two unidentified lenders for possible fraud involving allegations that they have misled consumers about interest rates or used bait-and-switch tactics, William D. Davis, special assistant to the state S&L; commissioner, said.

“When demand for loans and refinancings far outstrips supply, as is the case now, there are going to be (lenders) who want to take advantage of it,” Davis said. He said his office has received 173 consumer complaints about these problems so far this month, up from 10 in a normal month.

The state Department of Real Estate, which regulates mortgage brokers and mortgage bankers, reports a slight increase in consumer complaints and is investigating a number of cases, Commissioner James D. Edmonds said.

The combination of agonizingly slow approvals and sharply rising interest rates “is a disaster,” said Jack Grigsby, president of the residential mortgage arm of Coldwell Banker, a real estate firm headquartered in Los Angeles. The company is one of those reporting a higher rate of mortgage application cancellations.

“People have been crying, yelling, screaming, having fits, not understanding, asking what I can do to save them,” Grigsby said. “People are going through a traumatic experience right now.”

Frustration Told

“I am frustrated with watching interest rates go up and not being able to do anything,” said a 39-year-old Los Angeles accounting systems consultant who put in a refinancing application more than 11 weeks ago when the rate was 9.75%. He is still waiting for approval, but the rate is now 10.75%. “I feel like they have me over a barrel.”

The problem has also taken its toll on the lending institutions. They complain about being unable to add qualified personnel fast enough to handle the tremendous increase in their workload. They say the delays are not their fault and are due, instead, to delays in getting appraisals, credit reports and other requirements.

Some lenders have even taken steps to discourage new mortgage business. American Savings and Columbia Savings, for example, are among several lenders that have stopped taking applications for refinancings from homeowners who obtained their original mortgages from other lenders.

“We have more than enough business,” said Layna Browdy, spokeswoman for American Savings, which, as of June 12, quit accepting refinancing applications from homeowners with mortgages issued by other lenders.

Other lenders are raising application fees or are requiring applicants to pay fees up front. California Federal Savings, for example, now requires that its $200 application fee for fixed-rate refinancings be paid at the time of application, said Warren Raybould, senior vice president for residential loan production. Before, he said, customers could pay the fee when the loan went through.

“No one anticipated this kind of increase in volume,” said Larry Reed, head of residential lending for Columbia Savings, whose quadrupling of mortgage lending volume in recent months caused it to stop taking refinancing applications from outside customers as of June 1. “I’ve never seen anything like this.”

Not All Gloom

To be sure, not all lenders have suffered major delays in processing. And not all homeowners are unhappy with the current state of affairs. Many homeowners who had to take mortgages at rates as high as 13% and 14% as late as two years ago are ecstatic about refinancing into new mortgages in the 10.75% to 11% range, even though they could have had rates below 10% had they acted sooner.

Other consumers with applications still in the works are encouraged somewhat by slight declines in rates in the last two weeks and hope that rates will go still lower. The rates have declined largely because of news that the economy is not as strong as was expected.

Rates had also declined early in the year but then had risen in May and early June. The latest upward movement took place largely because of the feverish demand for loans and refinancings, and because of forecasts in May that economic growth in this year’s second half would be strong.

But so far, the recent rate declines have only slightly offset the sharp rises since early May, partly because strong mortgage demand into the peak summer home-buying season gives lenders less incentive to lower rates, some experts say.

Rates on 30-year fixed-rate mortgages nationally averaged 10.82% on June 18, down from a recent peak of 10.86% on June 11 but still higher than the 10.12% low on April 30, according to Bank Rate Monitor, a newsletter based in North Palm Beach, Fla.

Some lenders with rates lower than the national average have raised rates even higher. American Savings, for example, has raised its rate on 30-year fixed-rate mortgages to 11.25% from 9.75% on April 23.

Consumer Letdown

The current situation is particularly difficult for many consumers because their expectations soared after seeing single-digit rates earlier this year. But then, Coldwell Bankers’ Grigsby said, “Rates jumping back into the 10%-plus level blew people out of their minds.”

“When I found out my loan rate had risen to 10.5%, I flipped out,” said a 36-year-old advertising art director from Long Beach trying to buy his first home. His rate was 9.75% when he applied in April.

The enormous delays in getting loans closed is also raising frustration levels. Many lenders report backlogs of as much as eight to 12 weeks, up from the normal four to six weeks. One lender, Mellon Bank (East) of Philadelphia, has reported a five-month backlog.

“A lot of escrows aren’t closing on time, so people just aren’t getting the rate they want,” said a Glendale housewife who, with her husband, lost a 9.875% loan rate on a home they planned to buy when the loan did not close in time. As a result, they decided not to go through with the purchase.

The delays have been particularly troubling for applicants seeking loans insured through the Federal Housing Administration’s popular mortgage-insurance program. The FHA’s insuring authority expired June 5--the sixth such expiration in nine months--halting the processing of more than 400,000 FHA mortgage applications. A bill to renew the agency’s authority was signed Wednesday by President Reagan but that authority will only last until July 25, acting FHA Administrator Silvio DeBartolomeis said.

These and other delays have made so-called “locks”--guarantees by lenders that borrowers will have a certain rate--virtually useless at some lenders. Some homeowners who had been offered locks that were good for 30 or 60 days found that their loans closed after the locks had expired, allowing the lender to raise the rate.

Lock Offered, Expires

Pamela Rogow, a Los Angeles travel publication editor, said she was offered a lock on a 9.625% fixed rate in early May. But since then, the rate has gone up one point to 10.625% and her loan has not yet closed.

Angered and frustrated, Rogow said she is considering suing her lender, Imperial Savings, to try to get the 9.625% rate. Imperial, however, claims that Rogow was offered only a 30-day lock, which has since expired, and that she has not completed all application requirements.

Some lenders and mortgage bankers, including Imperial and Coldwell Banker, have stopped offering locks altogether on refinancings, meaning that in many cases the interest rate that applies is the one in effect when the loan closes.

Meanwhile, some lenders and mortgage bankers report increased cancellation rates on mortgage applications. Countrywide Funding, for example, is suffering a cancellation rate of close to 35%, up from 25% normally, Mozilo, the company’s president, said.

Lenders also report that, as a result of higher interest rates, many homeowners are no longer inclined to refinance. American Savings, for example, said 40% of its loan volume now is refinances, down from a peak of 80% a few weeks ago.

Rises in interest rates also have sparked a renewed interest in adjustable-rate mortgages (ARM), which declined in popularity as interest rates on fixed-rate loans fell. Rates on adjustable loans have not risen as fast in the last few weeks as those on fixed-rate mortgages.

Rate Increases Tracked

Since April 30, when rates bottomed, rates on 30-year and 15-year fixed-rate mortgages had risen by a national average of 0.7 and 0.69 percentage points, respectively, as of June 18, while one-year adjustable rates had risen by only 0.27 percentage points, according to Bank Rate Monitor.

“ARMs are again looking good by comparison,” Bank Rate Monitor publisher Robert Heady said, noting that most banks and savings and loans are overjoyed by this because ARMs are less risky to them than fixed-rate loans.

Some lenders have gone a step further in encouraging customers to take adjustable rate mortgages by dropping initial rates on adjustables while raising the rate on fixed-rate loans. San Diego-based Home Federal Savings, for example, recently dropped the initial rate on one of its adjustables to 8.5% from 9.5%, while raising 30-year fixed-rate loans to 11.75% from 9.875% in March, said Robert Campbell, group product manager for mortgage lending.