Refinancing Underwater Mortgages – What’s the Risk?

By Brandon Cornett | 8/25/10
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Reader Question: “I would like to take advantage of the lower interest rates, but as many people, my mortgage is upside down. If I already have the loan and I am completely capable of making the payments, what is the increased risk for banks to refinance me to a lower rate? This makes absolutely no sense to me.”

Brandon’s response:

You’re right. There’s not much additional risk for the banks. But there’s a loss of revenue for the company that owns and services the mortgage loan. They get paid off sooner, so they make a lot less money in interest fees. Then they’re just left with cash that probably can’t be invested as well at present (mortgage debt is a good investment, if the borrower is still making payments).

That is why they drag their feet when it comes to underwater refinance and mortgage modifications. From the bank’s / investor’s point of view, anything that reduces revenues is anathema. They are money-making machines, and nothing else.

Did you know the FHA has modified it’s lending program to accommodate more upside down borrowers? They are giving lenders monetary incentives (among other things) to refinance people who are underwater, as long as they are current on their payments. Here’s a fact sheet on these recent changes. You should look into that, and also the Making Home Affordable refi program. They are both designed for people in your situation — current on payments, upside down, wanting to refinance, etc.