Source
r/RealEstate•
linuxlass

why the mandatory 3 year wait period after foreclosure for a refinance? (OR)

I went through a divorce, and part of that shitstorn involved a foreclosure on an investment property, which was finalized a little over a year ago. Other than that one issue, my credit is great - several mortgages in good standing or paid off, car loan paid off, plenty of credit card accounts in good standing, my credit score is currently over 700.

My primary home's mortgage is with Wells Fargo. I've been in the house for almost 10 years now, no plans to move, great equity. I spoke to Wells Fargo about refinancing that loan to get a better interest rate and lower my payment and they said there was a mandatory minimum 3 years before I could even think about qualifying for a new loan. That no other factors could outweigh that requirement.

My question is: wtf? I understand that a foreclosure is a black mark that shows I'm an increased risk for default, but my current loan is with WF, so it's not like they aren't already assuming that risk now. And with a lower payment, I'll be at a lower risk for defaulting.

What is the logic at play here? How could they possibly be protecting themselves by refusing to replace one loan with another one?

Posted Nov 20, 2016, 8:47 PM UTC

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aardyLender in Bay Area•

What is the logic at play here?

What are you going to tell your friends when they say "so, u/linuxlass, I'm getting divorced and am thinking of doing a strategic foreclosure to keep divorce costs low..."?

How could they possibly be protecting themselves by refusing to replace one loan with another one?

It's a big picture move, not a little picture move. Your individual loan obviously isn't super important to them, and Wells Fargo holds onto many of their mortgages, so like you say they could simply disregard Fannie/Freddie guidelines and do their own thing. But they, and every other mainstream 30 year fixed competitive interest rate lender I am familiar with, lock arms with Fannie/Freddie to present a united front to consumers on the issue of foreclosures.

Think about this. What if Wells Fargo did in fact do your mortgage. What if they were the only lender in town that didn't shun you for three to seven years following a foreclosure. How long before word got out, and how long from that before Wells Fargo was itself in bankruptcy court because all these people with recent foreclosures (not just scenarios like yours, vanilla irresponsibility too) are, SURPRISE, right back in foreclosure a year or two later?

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wamazingAppraiser•

You might find a portfolio lender to make you a new loan - albeit at a higher rate than a GSE mortgage.

Mortgages are commodities now. Everything is a big data question. You are a higher risk, because too many people in your position have previously defaulted again. But it's because that system exists, that rates are as low as they are.

Same reason why you pay more for car insurance after you have an accident. You're more likely to do it again. Nothing personal of course, YOU perhaps are not. However there is no way for lenders to be sure of that.

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linuxlassOP•

I understand the "higher risk" thing, in general. But in this case, whatever risk I represent right now, they are already assuming. There's no additional risk by refinancing. And there is a slight reduction in risk just because I'll have a lower payment (and my house has a lot of equity).

If my current loan was with another company, I would understand. Or if I didn't have a current mortgage at all. But they hold my current debt. They already have the risk represented by the foreclosure on my record.

I accept that this is the state of affairs. My divorce has had a number of very unfair, negative consequences that I must accept, and this is just one of them. I'm just trying to understand the reasoning.

And from what I'm gathering, it's all about the overall actuarial statistics, and nobody is really interested in looking at the case-by-case details just on the off chance that they might be missing out on lending to someone that's actually a good risk. I imagine that a situation like mine is relatively rare to begin with.

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aardyLender in Bay Area•

I understand the "higher risk" thing, in general. But in this case, whatever risk I represent right now, they are already assuming. There's no additional risk by refinancing. And there is a slight reduction in risk just because I'll have a lower payment (and my house has a lot of equity).

If my current loan was with another company, I would understand.

You're assuming that WF owns the note just because they service it.

A South Korean Teacher's Pension Fund could own your mortgage. A refinance would pay that mortgage off. Then WF would have to go to that South Korean Teacher's Pension Fund and convince them to re-assume that risk when nothing is in it for them.

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linuxlassOP•

You're assuming that WF owns the note just because they service it.

This is a very good point. Yes, that has been my assumption. The logic you outline makes a lot of sense. Thank you for spelling this out for me :)

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wamazingAppraiser•

But they sold your loan to an investor, based on the risk you posed at the time. You cannot just change someone's rate. It is a new loan, a new security, a new investor. The system is logical when you look at the big picture. There is no way the system works for the masses as you are proposing.

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