Here’s a great article from SoCalMtgGuy explaining why the I/O borrower won’t be able to refinance. Read his blog for his view on why this housing market is going to utterly collapse and implode when the biggest credit bubble in history pops. If anyone disagrees with me on the extent to which savvy borrowers were able to buy with no money down, (sdr, I mean you), then just read this guy’s blog. Why would anybody put any money down when effective interest rates were negative, when you could lie about your income, and you could buy a house at 10x your salary with exotic loans? Of course people were doing that, and just because Fannie Mae won’t release the numbers to prove it, means nothing!

Back to refinancing. The key point is that they can’t pay the lender costs to refinance: “…So unless this borrower (which can’t afford a higher monthly payment) has several thousand in savings to pay the fees, they will need to use the equity to pay for the refinance.”

Other problems: don’t meet lender’s qualification of “benefit to the borrower”, negative equity, LTV too high, potential new debt lowering income ratio or credit score.

He concludes, “All and all, on paper it looks like there is going to be a massive refi-boom coming again in 2007 for sure. The problem is that many of those borrowers don’t intent to refi, they intend to sell. They knew they couldn’t make those payment for more than the introductory time period…but they wanted to make the money on appreciation, and then cash out. Even if only 15-20% of the people had that idea, that is still a ton of inventory that will be dumped on the market. Nobody knows for sure what will happen…as there is no precedent for the way money has been lent out these past few years.”