Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, October 4, 1993                   TAG: 9310040016
SECTION: MONEY                    PAGE: A-8   EDITION: METRO 
SOURCE: JANE BRYANT QUINN THE WASHINGTON POST
DATELINE: NEW YORK                                LENGTH: Medium

NEGATIVE EQUITY DASHES REFINANCING HOPES

Some houses and condominiums have negative equity, meaning they're worth less than the mortgage against them. Other owners have positive equity but not enough. To qualify for refinancing, your home's appraised value must be at least 10 percent higher than the mortgage amount to be refinanced.

If you don't meet that test, you're "in the second circle of refi[nancing] hell," says Paul Havemann, vice president of HSH Associates in Butler, N.J, which tracks mortgage rates. Today's wonderful 7 percent fixed-rate mortgages and 4 percent ARMs are passing you by. You have to keep throwing high interest payments down the drain.

When you first buy a house, you need only 5 percent equity, plus mortgage insurance. How come lenders force you to have 10 percent before you can exchange an old, high-rate mortgage for something cheaper?

The rules are laid down by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), which buy mortgages from lenders and resell them to investors.

According to Robert Engelstad, Fannie Mae's senior vice president for mortgage standards, the true value of a house, at refinancing, isn't clear. It's based only on an appraisal, which is a guess, rather than on a marketplace of buyers and sellers. When a house is first sold, the size of the mortgage also is based on an appraisal, but that guess is supported by a dollars-and-cents transaction. Lacking that, Engelstad says, investors want a larger equity cushion, in case the appraisal is too high.

Fortunately, most borrowers can refinance readily. But the trapped minority is a significant number. Based on a 1991 study, Jonathan Gray, senior research analyst at the brokerage firm Sanford Bernstein in New York, estimates that at least 10 percent of the homes in Southern California are at zero or negative equity, as are 7 percent to 8 percent of the homes in the Northeast. Those percentages would be higher, had he counted those with equity under 10 percent.

Most cases involve higher-priced homes, Gray says. In Southern California, the wipeout hit houses priced in the $500,000 range and bought from 1988 to 1990. Low-priced homes, on the other hand, have generally gone up in value.

If you have less equity than you need to refinance, how might you lower the cost of the house or condominium you're living in?

Get a second appraisal, if the first one fell just a little bit short. The new appraiser has to be approved by the lender.

Put up more money. Take cash from savings or add more to the principal every month, until you have 10 percent equity. Paying off a portion of your loan is an excellent investment today.

Press any FHA/VA privileges. The government allows lenders to lower the interest rate on VA loans, even when the house is worth less than the mortgage amount - although not all lenders go along. FHA loans can be refinanced without appraisals - called "streamlining" - although that's rarely done in areas where properties have dropped in value.

Press your lender, if your income drops. The bank may refinance a home with negative equity, if the only alternative is foreclosure and a lower rate of interest will allow you to keep the house.