Although interest rates are near record lows, many financial advisory clients still face a challenging lending environment for securing small-business loans and refinancing mortgages.
“Even people with good credit are still challenged to get the cheaper rates if they have any shadow of problems with their credit, and it doesn't have to be dramatic,” said Mark Balasa, president and chief executive of Balasa Diverno Foltz LLC, which manages about $1.85 billion in client assets.
Homeowners with solid credit ratings are finding that any instance of income instability or a slowdown in business growth — or even declining home values — can block them from getting approval to refinance.
NEGATIVE EQUITY
Those with mortgages that are worth less than the amount due to the lender — so-called underwater mortgages — find it pretty much impossible to refinance.
In some cases, advisers have clients holding second homes with negative equity. They want to refinance to lower rates that would ease their losses as they wait for prices to rise, but they can't.
President Barack Obama last week said that more than 10 million homeowners have mortgages that are underwater, thanks to home prices that have dropped an average 17% since 2007. Nevada has been the hardest hit, with 60% of that state's properties underwater, according to a CoreLogic study released last month.
Nevada served as the backdrop for Mr. Obama's announcement last week that the Federal Housing Finance Agency will ease refinancing standards for some loans to help those with mortgages that are underwater. The new rules apply only to loans guaranteed by Fannie Mae or Freddie Mac, and borrowers also must meet certain criteria, such as having had no late mortgage payments in the past six months.
Housing and Urban Development Secretary Shaun Donovan estimated that borrowers who refinance to the current rate of about 4%, from loans with 5% or 6% rates, could save as much as $2,500 a year.
The CoreLogic study found that negative equity is significantly limiting the ability of borrowers to benefit from the low-rate environment.
MORE FLEXIBLE
“High negative equity is holding back refinancing and sales activity, and is a major impediment to the housing market recovery,” said Mark Fleming, chief economist at CoreLogic.
Some advisers said that their clients have had better luck refinancing mortgages with smaller banks and credit unions, which are being more flexible than big banks in making loans.
One client of financial adviser Steve Hamant sold his home for $1.5 million in Northern Virginia and purchased a $1.2 million property in Arizona. He paid $800,000 in cash and wanted to finance the remaining $400,000.
“He had trouble getting financing because he is retired and they said he had no income,” said Mr. Hamant, a Richmond, Va.-based adviser with LPL Financial LLC. “That's ridiculous.”
The client had to visit three or four lenders before he found a bank to provide the mortgage.
The bigger banks face tight standards and have trouble “looking at things from a rational standpoint,” Mr. Hamant said.
Financial adviser Jose Cornide had trouble himself last year when he purchased a home in Vail, Colo. Even though he put 50% down and bought into the market at the cheapest price, it still took 65 days for the mortgage to close, and he had to agree to a 30-year fixed rate instead of the 10-year interest-only loan he sought.
Mr. Cornide, a UBS private-wealth adviser in Coral Gables, Fla., and colleague Kevin Neal, have been able to get two of their ultrahigh-net-worth clients refinanced through UBS in the past six months.
Mr. Cornide's own loan wasn't through UBS, he said.
“Many people are stuck in their homes,” Mr. Cornide said. “Clearly, that is what's keeping the residential market down.”
In some situations, banks can't find anything wrong about the mortgage applicant, but they still resist giving out a loan.
One of Mr. Balasa's clients, whose primary residence is in a Chicago suburb, sought to buy a condominium within the Trump International Hotel and Tower in the city. His longtime lender told him that the rate would be 8%, even though the client could show he had enough cash to buy the unit outright.
“The bank said it wasn't interested in expanding its portfolio,” Mr. Balasa said.
The client was able to secure a mortgage with a 4.5% rate from a competitor.
SMALLER LOANS
The credit crunch also has made it difficult for small-business owners to get loans to invest in new inventory and expansion.
Karen Mills, administrator of the Small Business Administration, told a congressional hearing last week that the upper end of the small-business-loan market largely has come back.
For smaller loans, it is a different story.
“The agency believes that there is a gap in small-dollar loans,” she said. “The under-$150,000 loans have not come back.”
For anyone looking for business loans that are less than $1 million, “money is much more difficult to come by,” Mr. Neal said.
Another of Mr. Balasa's clients owns a furniture business, and his bank wouldn't renew the firm's line of credit, because the business has been so challenged by the economic downturn.
“Underwriting for small-business loans is so different than it was three or four years ago,” Mr. Balasa said. “The lending agreements have been rewritten, and the pendulum has probably swung too far.”
Email Liz Skinner at [email protected]
