Have you ever wondered about the lengthy process of refinancing a mortgage? This extended duration is largely due to stricter lending standards established after the 2008-2009 Global Financial Crisis. Underwriters now demand more comprehensive documentation to verify income and net worth, a significant shift from the pre-crisis era of lenient lending.
Before the financial crisis, banks were more liberal with lending, but this approach backfired with the housing market crash, leading to significant financial losses. Consequently, regulators clamped down, resulting in heightened lending criteria in today’s robust housing market.
By 2022, the benchmark for an approved mortgage applicant’s credit score was 760, with a score of 800 or above needed to secure the best rates and minimal fees. Moreover, a minimum 20% down payment has become standard, especially for substantial loans like jumbos. This tightening in the lending industry was particularly noticeable during the pandemic, as the sector aimed to avoid a repeat of the 2008-2009 crisis.
Reflecting on my personal experiences with refinancing, I’ve noticed a substantial increase in the time it takes. My mortgage refinance in 2016 took a staggering 97 days, a sharp increase from the 45-day average of my previous refinances between 2005-2010. A 2019 refinance was equally challenging, exceeding 60 days. Even getting preapproved in 2020 was a five-week endeavor, though it eventually allowed me to purchase a house at an opportune time.
So, why has the mortgage refinance process become so drawn out since the financial crisis? Based on extensive research, conversations with loan officers, and personal observations over 24 months, I’ve identified six key reasons for this slowdown.
Government-Imposed Standards
Post-crisis, governments invested billions in bailouts for major financial institutions. The public’s frustration led politicians to impose stricter standards on banks, including higher capital requirements and limitations on activities like proprietary trading. Government involvement often introduces inefficiencies, a fact exemplified by the differences between the United States Postal Service and Federal Express.
High Credit Score Requirements
In 2020, the average approved applicant had a credit score above 760, considered above “excellent.” This high requirement potentially excludes younger demographics and those still building their credit history. Additionally, improving a credit score to this level can take years, coupled with the necessity of a substantial down payment and a favorable debt-to-income ratio.
Rigorous Bank Underwriting
My own refinancing experience involved repeated requests for extensive documentation. The process is often staggered, with lenders requesting documents in pieces, significantly prolonging the timeline. Mortgage underwriters have become increasingly thorough, frequently asking for repeated submissions of documents like insurance details, student loans, and other financial records.
Constraints in the Mortgage Secondary Market
The market for mortgage-backed securities is still recovering, affecting banks’ ability to offload risk. This hesitancy impacts their willingness to lend, affecting various mortgage types and the overall lending process.
Surge in Home Buying Applications
Post-pandemic, there’s been a spike in both refinancing and home buying, largely due to historically low mortgage rates and economic stimulus measures. Banks often prioritize home purchases over refinances due to the time-sensitive nature of these transactions.
Industry Understaffing Post-Layoffs
The financial crisis and the pandemic led to significant job losses in finance and real estate, resulting in understaffed mortgage departments. This shortage inevitably slows down the refinancing process, regardless of a borrower’s attractiveness.
In addition, negative real mortgage rates due to high inflation make borrowing more appealing, further increasing demand for mortgages and refinancing.
Given these factors, the new norm for mortgage refinancing is likely to be between 60-80 days. Setting realistic expectations can mitigate frustration with the process. The future of housing remains promising, and refinancing today is likely to involve lower default risks.
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