Refinancing Can Prove Elusive : If Home’s Value Has Plunged, Banks Won’t Agree to New Loan

When Neal Feigelman approached a mortgage broker last month to see about refinancing the loan on his Hermosa Beach home, he figured that the deal would be “a piece of cake.”

He’d get an appraisal, fill out some paperwork and soon slash hundreds of dollars off his monthly housing costs by cutting his interest rate in half.

But to Feigelman’s dismay, the appraiser’s report said the home was worth $10,000 less than he had paid for it just two years ago.

To make matters worse, his broker said he’d have to come up with cash to offset his equity loss before he could refinance the loan.

“I had to scrap the whole idea,” said Feigelman, a 32-year-old insurance broker. “Between the low appraisal and the extra money I’d have to put up to get the new loan, it just made more sense to keep my old mortgage.”

Feigelman isn’t alone. Thousands of borrowers across the Southland who’d like to refinance at some of the lowest mortgage rates in 20 years are being told that they can’t qualify for a loan because property values have plunged and their equity has evaporated.

“It’s a nasty one-two punch,” said Olga Moreno, a mortgage broker and owner of Bona Fide Financial Corp. in Pasadena.

“First people find out that their equity has dropped 5%, 10%, maybe even 20% over the past few years. Then they find out that they can’t refinance at (today’s) lower rates because a lot of their equity is gone.

“A lot of homeowners aren’t too happy right now.”

Lenders say the people who are suffering the most purchased their homes with small down payments about two or three years ago, just as home prices in most Southland neighborhoods peaked.

Consider a hypothetical borrower who made a 10% down payment on a modest-sized home at the end of 1989.

At the time, according to La Jolla-based Dataquick Information Systems, the median-priced Los Angeles house in the 1,700-square-foot range was selling for $245,000 and rates on 30-year, fixed mortgages were about 10 1/4%.

So, the borrower would have made a down payment of about $24,500 and monthly payments on the loan would be about $2,000.

Rates on fixed-rate loans have since dropped to about 8 1/2%, and the borrower could save nearly $300 a month by refinancing.

But the median price for a home that size has since dropped to $223,000, Dataquick says, which means that the equity the homeowner gained by making the original $24,500 down payment has nearly been wiped out.

“We’ve seen prices drop 10% to 20% in a lot of areas, especially in places like West L.A. and Orange County,” said John Karevoll, a Dataquick analyst. “It’s been pretty bloody.”

Most homeowners who have seen their equity wiped out by falling values can’t expect much help from their lender.

That’s because most banks and savings and loans insist that a homeowner who wants to refinance have a minimum 10% or 20% equity stake in his property.

“If you don’t have any equity, we can’t give you a new loan unless you have some cash to pay down your current mortgage,” said Bruce Norman, a mortgage banker and executive vice president of First Mortgage Corp. in Diamond Bar. “Making a loan to someone who doesn’t have a financial interest in the property just wouldn’t be prudent.”

But that explanation doesn’t sit well with homeowners, especially those with sterling credit records who want to refinance but can’t because their property’s value has declined.

“My payment record is perfect, but I still can’t refinance because the bank says my home is worth $25,000 less than I paid for it,” griped Ann Taylor, who bought a two-bedroom house in West Los Angeles in 1990.

“The whole situation is stupid,” she said. “I’ve been making $1,700 payments for two years, but I could knock it down to $1,350 if I could find a lender who’ll let me refinance.” Indeed, lenders admit that refusing to renegotiate the terms of loans made to buyers who have lost their equity is a risky proposition.

“We basically have to play the odds, figuring that most borrowers won’t give up their house even if they’re stuck with a high interest rate,” said Tom Criser of Shearson Lehman Mortgage in Calabasas.