To Boomers and Refis: A Warning

By Ken Harney 5/25/2012 6:36 PM

WASHINGTON – It’s a mortgage problem that is likely to intensify as homeowning baby boomers by the millions shift into retirement: Though they may have significant financial assets tucked away in retirement accounts, their diminished monthly incomes may not be sufficient to meet some lenders’ hyper-strict underwriting rules.

Jim Eberle of McLean, Va., found this out the hard way when he applied to refinance his mortgage. After spending much of his career working for banking industry trade associations in Washington, Eberle, 68, decided to take advantage of this spring’s unprecedented low interest rates with a 2.89 percent adjustable-rate 30-year loan offered by a large Midwestern bank.

To his utter shock, Eberle was rejected – the first time in 45 years of homeownership and eight different home loans. The reason for the turndown: insufficient income. “To get rejected was incredible,” Eberle said in an interview, because based on the extensive documentation he provided the bank, he looked highly qualified. He had substantial checking, savings and 401(k) holdings and a net worth he describes as “in seven figures.” The appraisal the bank did on his house showed it to be worth $664,700 – more than double the $322,000 refi he was seeking. His credit score, according to TransUnion, was 826, indicating minimal risk of default.

Yet the bank “told me it could not make the loan because, even though I have sufficient (liquid) assets and a high credit score,” his monthly Social Security payments, bank deposits, checking accounts and 401(k) plan “were not enough.”

How commonplace is Eberle’s experience? Conversations with mortgage lenders and analysts suggest it is happening more frequently, thanks to some large banks ratcheting up their underwriting standards so tightly that the old joke – they’ll only lend to people who don’t really need the money – is beginning to resemble reality for some borrowers.

Eberle says he was willing to pull out funds from his checking and banking deposits and set them aside to make up any perceived monthly income shortfalls. “I was willing to do whatever it took,” he said. But the bank still said no.

Mortgage market experts, such as Dennis C. Smith, co-owner of Stratis Financial in Huntington Beach, Calif., are not surprised at Eberle’s experience. Smith had a recent client – a physician seeking a $350,000 loan with $2.5 million in bank accounts – who was rejected by one lender because the deposits, which were proceeds from an inheritance, had been in his account for just eight months. This was too short a time period to satisfy the bank’s pristine and unyielding standard.

Part of the problem here, according to Smith, appears to be overcorrections by some banks to the lax underwriting that characterized the years leading up to the housing bust – especially see-no-evil practices such as “stated income,” where the loan officer accepted the monthly income number provided by the applicant with no verification. But another factor, says Bruce Calabrese, president and co-founder of Equitable Mortgage in Columbus, Ohio, is that some loan officers aren’t aware of techniques available for qualifying retirees who are asset-rich but income-deficient.

For example, Calabrese’s firm employs “annuitization” procedures acceptable to Fannie Mae to help borrowers over 59 1/2 qualify on income tests using their IRA and other retirement account balances. “We take 70 percent of the total value of the funds and then spread them out over 360 months if the loan is a 30-year fixed and 180 months if the loan is a 15-year fixed. We also gross up their Social Security by 1.25 percent. So if they get $1,000 per month in Social Security income, we give them credit for $1,250 as long as they don’t have to pay income tax” on that income.

Jeff Lipes, vice president of Rockville Bank outside Hartford, Conn., uses similar income-qualification procedures sanctioned by Freddie Mac. Say you’re a senior with $1 million in a brokerage account. To help qualify you for a refi, Lipes would “discount the value by 30 percent to $700,000 and use a conservative rate of return – say 2 percent – and that would give the person (an extra) $14,000 a year in income.”

Some of the computations can get complex, but the message here is clear: Just because a homeowner’s post-retirement income is below what it used to be, this doesn’t mean he or she can’t refinance, get a new mortgage or buy a house, provided they have sufficient retirement assets. You just need to shop around and deal with experienced loan officers who know the ropes and are willing to work with you for your business.