Your post is going to ring true for a lot of people out there. Unfortunately, the industry has a lot of complexities, and there are a lot of hands involved in every mortgage - while it may seem as though the world is out to get you, let me offer a few extra bits of information:
If the credit union or lender is writing you a standard, "conforming" loan (which it sounds like you are seeking), then chances are, they are not waiting for rates to go back up. They don't actually care what your rate is at all, in terms of a number - just how it compares to other loans being made at the same time ("the market"). Loans are "pooled" together and sold as a group to investors or on wall street after you get them - this means that the lender (like the credit union) is going to make a loan to you and then sell it at market price to an investor to get the money back to lend to someone else. They may be the ones that you pay (called the "servicer" of your loan), but they don't wait all 15 or 30 years to get their money back from you. They sell the right to collect interest from you to someone else and get their money back right away. If they had to wait years and collect interest, they would run out of money very, very quickly and not be able to lend to anyone else for 15-30 years.
The investor is just buying pools of loans in order to collect the interest long term, almost like a CD pays interest (but you can't touch the money) - they DO have to wait to get their money back from you in the form of interest and principal payments. But they don't need to lend their money to anyone, they are looking to make money . . .so they can afford to wait and make a profit.
But . . . the investor does NOT control the rate on your loan. Instead, the investor looks at all the pools or loans that are available all over the place and decides how much he or she (or it) is going to pay for a group ("pool") or loans and what group they want (i.e., rates in the 5% range, or loans that are only 10 years long, etc.). The rates are already on the loans. The investor already knows what the rates are, so he or she decides how much he or she is going to pay for the pool based on the market price and the expected return over the years of payments. Sometimes they pay more than the loans are "worth", and it takes them a couple years to break even, because they figure that they are going to make a little money each year for a long, long time. Pools of loans are sold to investors with rates in the 4s and with rates in the 7s in the same day - the credit union or lender that is making the loan does not worry about the rate, only about covering their costs, collecting a payment or two, making a small immediate profit when they sell the loans, and relending to repeat the process.
The investors / buyers look at the loans and the rates in each "pool" and have to figure out . . .
How many of these people are going to hold their loan the whole 15 or 30 years?
How many are going to refinance or sell in a year or two, pay me off early, but NOT pay me all 15 years worth of interest?
(Figure, this is more likely if the rates on the loans are at 7% and the market rate is at 5% - people will refinance and not keep paying the 7% -so investors that buy the high interest rate pools may not acutally make as much money as they thought at first . . .or as the investors that bought the pools that don't get paid off early but have a lower rate. Slow and steady. On the flip side, if the rates in the pool are 4% and the going rate is 6%, only a small portion of those people will pay off early - usually those who sell the home. So the investor can count on getting interest payments for a long time . . . but what if there are better investment opportunities in 10 years? Too bad, so sad. Have to wait all 15 or 30 to get the money back.).
What are rates going to do in the future - is my money going to performing well if it is getting 5% a year in profit from the interest, in comparison to what is available in a year or two . . . or 10?
Is this a good or bad investment short term and long term?
The "agencies" Fannie Mae and Freddie Mac are investors/buyers of these loans - NOT the ones who actually lend the money. Instead, they take pools off the hands of lenders so as to keep the money flowing. Private investors participate, too, but purchasing securities backed by agency loan pools. The bloggers on this site have excellent, less simplistic versions of the above posted in the commentary sections of this site, but the above is a good quick way to look at it.
Because most lenders (like the credit union) are making the loan, and then selling it, it makes no difference to them what rates do in the long run - they are interested in making sure that they make a solid loan at market rate, whatever that may be, and then being able to sell it with no problems - this means documenting the borrowers ability to pay, the value of the home, etc. They also want to know that if they can't sell the loan quickly, for whatever reason, and they get stuck with it . . .and you stop paying . . . they can sell the home and get most or all of their money back.
Unfortunately, no matter what you paid for it a year ago (and I believe you, it is rough out there), the lender or investor probably couldn't get that price now if they had to foreclose on you. SO they have to assess their risk by what they could realistically get for the house RIGHT NOW, in this soft market.
The amount of money you borrow (the "loan") compared to the current would-be-sale price of the home (the "value") determines your "loan to value" ratio. If you borrow 95% of your home's current would-be-sale-price, you have a "high" loan-to-value ratio, 95%, meaning that you are borrowing almost as much as the home is worth. If you borrow only half of the home's current would-be-sale-price, then you have a "low loan to value" ratio, 50%, or plenty of "equity" in your home. (Unfortunately, there aren't too many people in this situation right now).
Imagine, if you had 50% equity in the house and stopped paying the loan . . . the lender or investor would have fees piling up (interest, legal fees, taxes, insurance, etc.) - but even if they had to carry all those costs for 6-12 months, then pay an attorney to foreclose, and then pay a real estate commission to sell the home, they would probably STILL get all their money back. If you had a loan to value ratio of 95, though, or only 5% equity . . . forget it. That isn't enough to even cover the Realtor costs, let alone all the interest, taxes, legal, etc. They would lose A LOT of money. Maybe 25% of your loan amount. Maybe more, especially if values continue to drop. This is why many borrowers with high loan-to-value ratios also have to pay for mortgage insurance each month - to help cover the losses if the loan stops getting paid.
Because of this, investors demand that they get a higher profit on the loans with a high loan -to-value ratio to make up for the risk that they are taking. And it is, simply, MUCH MORE RISKY for a lender to lend 95% of the value of your home compared to 50 or 75. Frustrating, especially if you have a good payment record and excellent credit, but you can see it from their side, too. That 1% fee is probably to compensate the lender for a lesser price that they are going to receive from the investor for your high loan to value loan (or to pay the investor to take on the risk). Fannie mae and Freddie mac have REQUIRED certain add-on fees like this, and lenders have no choice in the matter - fannie and freddie will refuse to purchase the loan if it is not charged.
You can see the list of agency fee add-ons here: https://www.efanniemae.com/sf/refmaterials/llpa/pdf/llpamatrix.pdf. There is no flexibility here. You can pay the fees in the form of a higher rate OR as a fee at closing, but one way or the other, they must get paid in order to fund.
Because the credit union probably didn't give you the loan before, they are not on the hook for the higher price that was paid and the old, higher value. Frankly, it doesn't mean anything to them. All they care about is making a smart investment now, so the loan to value ratio really matters. They can either give you a much higher rate, to promise the investor that buys the loan that they will make extra money each month to compensate for the risk, or they can charge you a fee so that they have some money on hand to cover the losses for the loans that don't "perform" (that is, people don't pay them like they should).
As for appraisals . . . yes, the appraisal industry has many issues right now. New regulations intended to protect homeowners from fraud forces lenders to use third party or "buffer" services to order appraisals, making sure that the appraisers do NOT write reports to "match" the necessary value to do the loan, but instead give honest opinons of value. Unfortunately, because of the need for these third parties (many of whom have just opened and don't know much about appraising!), appraisals are taking longer, costing more, and being managed by people at times that don't use the right appraisers (those that know a lot about a particular neighborhood).
That said, an appraisers job is to look at the homes that have sold MOST RECENTLY in your neighborhood. When an appraiser looks at your home for a refinance (and your home is not for sale), he or she is imagining a buyer who would buy your home. They he or she is looking at other homes that have just sold that would be of interest to THE SAME (imaginary) BUYER - that is, they have similar size, bedroom count, lot, ammenities, etc. They are "comparable" to your home. Even if a homeonwer paid $400,000 for a 4 bedroom, 2 bath home on a half acre lot a year ago . . . if there are 3 homes that have just sold to buyers looking for 4 bedroom, 2 bath homes in the neighborhood this month, and the prices were 300K, 315K, and 285K, the appraiser has to assume that they would not even looked at the borrower's once 400K home unless it was in the same range. So the "market value" of the home, that is, the would-be-price, the "appraised value" of the home is going to be around 300K, no matter what it once was. There is some variation and flexibility for nicer kitchen and bath, porch, dead end street, etc . . . but not a lot. Basically, if you were a buyer of a 4 bedroom, 2 bath home in a neighborhood right now, and there were three homes available in the 300K range, you would never look at the more expensive ones . . . so until the market price of appraised home was set in that range, it would not sell.
Appraisals have a short window of look-back, unless there is something very unusual about the property. This means that anything that happened more than 3-6 months ago doesn't matter. At all. On the bright side, it means that everything that is happening now isn't going to matter 6 months from now . . . quick collapse, but could be a quick recovery, too, with increased home turnover.
Making Home Affordable is not a perfect program, nor is it intended to help a lot of people - and it definitely doesn't help everyone that would like to refinance. A lot of people are simply not going to be able to refinance. Why would a new lender (and new investor) want to lend out MORE money than the current value of the collateral (the home)? While we as consumers often think they should, because we paid so much in the beginning, and we have been good and loyal customers, this makes absolutely no sense from a business perspective. When they lend out 100% or more of the value of a home, they take unbelievable risk . . . risk that could cause them to fail as a business . . . and after the last few years with so many failing banks, no lender wants to be in this position, no matter what program the government is announcing or the media is saying is terrific (without understanding it).
Many people are going to be stuck with the loan that they have until values come back and the economy kicks back into gear. Period, end of story, really. Making Home Affordable was specifically targeted in the homes of encouraging some people not to walk away from their homes even when they couldn't afford them. . . to ride out the market, and wait for better times. When lots of people just walk away from their homes . . . there are MORE foreclosures, . . . more bank owned home sales that provide more low comparable sales prices . . . .or vacancy that deteriortates neighborhoods . . . that causes more low appraisals because of the low comparable prices . . .that keep people from being able to refinance, . . .and that causes even more people to walk away from their homes. It is a vicious, vicious cycle, and the government (and the "agencies", fannie mae and freddie mac) was trying to at least help the most helpless of folks stop and think before they walked away.
It came with a lot of hype, unfortunately, and the media made it seem as though everyone was finally going to get a lower rate on their mortgage - not so, as you are discovering. Many people are just going to have to keep the loan they got in the first place (or, as my aunt used to say, "you get what you get and you don't get upset"). We hope that some of those folks at least got reasonable rates and took fixed loans so that they can afford to wait it out. Some did, some didn't. I hope your loan is affordable to you in the meantime, I genuinely do.
I don't write all this in order to rub it in . . . I understand that it is rough. I have written a lot of loans over the years, but I also own multiple properties, I'm on both sides. Some of mine have lost value. Some probably could not be refinanced without "risk level" surcharges like the 1%, unless I paid down a lot more principal. So, I'll have to pay a lot or keep the loans I have (which, even though I work in the industry, were written when rates were higher than they are now). I can't get myself out of the surcharges any more than you can. There WAS a lot of greed and corruption that caused a lot of this housing bubble mess. But in most cases, it isn't the fault of the lenders still in business. Many of them have paid the ultimate price for bad lending . . . they are dead and gone. Your credit union is likely a not-for-profit company - they are simply playing by the new rules and protecting their members (you!), and certain risks cost extra or have to be avoided altogether.
If you post your specific questions as they come, many of us would be happy to help in anyway we can to steer you towards the most affordable and most helpful loan you can get. We want borrowers to get better loans - it is very, very hard to say "no" all day long. But we also know that there are a lot of forces at work . . .and that the evil that has already been done is not easily undone at this point. Only time will heal that.
Hopefully others chime in - I agree, it helps to know you are not alone. Best of Luck!