I think the nature of the lending and appraisal process may keep the refi’s going for a while longer. Appraisers are hired by mortgage brokers (in many cases) who get paid when loans fund. If a loan doesn’t fund, neither the mortgage broker nor the appraiser gets paid. Guess what, the house will appraise at the value needed for the loan to go through. I think the banks are aware that a lot of these loans will not be repaid but they don’t care since they sell the loans to Fannie Mae and Freddie Mac and make a nice profit on the transaction. Even for the loans that the bank keeps, they can count of the government bailing them out when the loans start going bad so as not to disrupt the banking system. The ultimate underwriters are the TAXPAYERS but we have no say in whether these types of loans get funded!
Also, when you think about a bank funding a loan based on someone barely qualifyiing at a “teaser rate”, the bank knows it is highly likely that the borrower will default once the teaser rate adjusts to a market rate. They don’t care. Same goes for stated income loans. The banks are making money on these loans knowing a lot of them will default. The only way out of it will be for the government to print more money to bail out the banks. The resulting inflation will be equivalent to a tax on the US population.
In the end, this can only go on for so long and eventually, you are right, people will NOT be able to refi and there’s no way the numbers can be massaged to make it work. People won’t even WANT to refi since their debt will be > than their home’s value. That’s when the house of cards will fall. I don’t think we’re too far off from that; it’s starting slowly. Some people still have some equity when the inflated appraisals are used so that’ll keep SOME of these refi’s going for awhile. As far as the income part of it, maybe some of these loans are using low teaser rates and/or stated income.
