Caught up in refi quicksand

Kenneth R. Harney Oct 10, 2014

WASHINGTON – Ed Fine’s recent rejection for a refinancing of his home loan wasn’t exactly like former Federal Reserve Chairman Ben Bernanke’s. But there are enough similarities to raise questions about current tight mortgage market standards and how lenders scrutinize applicants’ incomes.

At the very least, there are lessons for anybody who can’t document months of steady, predictable income, whether from salary, regular retirement fund drawdowns, or other sources.

Bernanke’s refi blow-up was widely publicized last week. He didn’t specify why he was turned down or by whom, but mortgage industry experts say most likely it was because he experienced a disruption in his regular employment income stream. He retired from the Fed at the end of January. Though reportedly he has since made $250,000 for a single speech, has a book contract and is now a resident fellow at the Brookings Institution, his income pattern may not have fit the standard mold in an era of computer-driven underwriting.

Fine, 72, isn’t coy about why he got turned down by two major lenders – it was an irregular income pattern – and he’s steamed about it. The retired defense contractor lives with his wife in a house they own in Shalimar, Fla. The Fines also own a rental house in Northern Virginia and a rental condo in Shalimar. The couple’s regular monthly income of around $3,500 consists of Social Security and pension fund payments and rental income. They supplement that when needed by making withdrawals from their IRA, which currently exceeds $250,000. With high FICO credit scores and no delinquencies “ever,” Fine says, “we are not hurting financially.”

But, like Bernanke, the Fines couldn’t get through the refi hoops, even though their lender, Quicken Loans, solicited them to apply. Ditto for a term extension on their home equity credit line from Bank of America, which also solicited their application.

The rationale for rejection from both lenders- The Fines’ sporadic drawdowns from their IRA could not be added to calculations of their qualifying monthly income. As a Quicken Loans official said in a letter to them following their complaint to the federal Consumer Financial Protection Bureau, the couple could not show “consistent monthly draws from the [IRA] account.” This creates debt-to-income ratio problems, the Quicken letter said, because for income from retirement accounts to qualify, there must be “verification of regular receipt of [drawdown] income for two months, and verification that the payments will continue for three years.”

Other lenders would require similar verifications, the Quicken official noted, and indeed, Bank of America’s letter to the Fines said their “validated income” was not sufficient to “support the level of your monthly debt.”

Rules like this, Fine told me in an interview, create unreasonable barriers for seniors and retirees who may have significant wealth tied up in stocks and bonds in IRAs that they prefer to tap into only when necessary.

“They [the lenders] don’t trust us to manage our own finances,” he said, despite excellent credit histories and prudent financial management over a lifetime. Fine calls it a new form of age discrimination – one with far-reaching implications as growing waves of homeowning baby boomers surge into retirement and look to their IRAs and 401(k) plans for income.

Lenders such as Quicken and Bank of America reject the discrimination charge outright. “We want to make loans,” said Mike Lyon, vice president of operations at Quicken, but there are industry rules that must be followed. He pointed to guidelines from giant mortgage investor Fannie Mae that require lenders to look for “regular and continued receipt” of income from retirement funds, and to “determine whether the income is expected to continue for at least three years” after application.

Lenders have some wiggle room on granting credit when an applicant has lots of money invested in stocks and bonds and doesn’t want to liquidate them on a regular basis. For example, Freddie Mac allows lenders to “annuitize” applicants’ retirement fund assets, turning untapped IRA and 401(k) wealth into “income” that helps them qualify for a mortgage.

Bottom line- If you are in or heading for retirement and may need mortgage money at some point, be aware of the industry’s rules on recurrent income flows. Lenders will not, as Fine found out, trust you to make intermittent drawdowns of funds when needed to pay the bills. You’ve got to do it consistently – and ideally, well in advance of any mortgage application.