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Low, low mortgage rates mean zip
Today's report on mortgage rates shows them dropping below 5%. Normally, we'd be seeing a refinancing boom to go along with that. But in many cases, refinancing is so expensive or completely out of reach, low mortgage rates make no difference whatsoever.
Some mortgage bankers say higher fees by lenders have undermined the effort to encourage refinancing. Fees that Fannie and Freddie began imposing in 2008, as loan delinquencies began to rise, have made it unattractive for some borrowers to refinance. For example, a borrower with 20% down and a 695 credit score seeking to refinance must pay fees equal to 1% of the loan amount. Those fees rise for borrowers with weaker credit scores, higher loan-to-value ratios, or other risk factors.
Overcorrecting for the abuses of financial institutions "has defeated the Fed's purchase program," said Alan Boyce, a mortgage-securities-market veteran. Those loan fees, he said, are partly "responsible for why there's been no refi boom."
Besides the increased fees, there's that other issue we've discussed -- homeowners who are so far underwater with negative equity, they can't even sniff a refinancing.
And keep in mind, this is a seriously propped-up housing market. The Federal Reserve's massive purchase program of mortgage-backed securities has kept interest rates low and stable. The Fed is planning to end the program March 31st. So what happens then?
Interest rates are clearly going to rise, but it's difficult to say by how much. Some thoughts on that:
Fed Vice Chairman Donald Kohn told a conference last month that any increase in rates is likely to be "modest" but added "that judgment is subject to considerable uncertainty." Yun (National Association of Realtors) believes 30-year fixed rates will probably end up jumping to about 5.7 percent by year's end.
Freddie Mac, which issues many of the (mortgage-back securities) being bought by the Fed, said in late December that rates would hit 6 percent by the end of 2010, sending a shock through the market. But Amy Crews Cutts, Freddie's deputy chief economist, now foresees a rate increase more in line with Yun's prediction, saying that any upward pressure on rates will likely be offset by a dropoff in demand.
As the old saying goes, there's never been a better time to buy -- unless home prices keep falling and unless you can't take advantage of the low rates. And there's a good chance both of those are true. A lot of people will continue to sit tight, by choice or not.
You could argue that the government's action -- while "stabilizing" to the housing market -- has also delayed its recovery, and by extension, the economy's recovery. But the government continues to step in:
On Monday, the Obama administration said it would extend for a year a program launched last April to help homeowners with little or no equity to refinance. That program, which had been set to expire this June, was called a "failure" last week by analysts at Barclays Capital. While the administration had said it would benefit millions, so far just 188,000 borrowers who owe between 80% and 105% of the value of their homes had refinanced through December. Last September, it was expanded to include borrowers who owe up to 125% of their home value, but fewer than 2,000 borrowers have used that program through December.
There may be only one course of action left on the housing market: Let it be. What do you think?
I recently tried to refinance the house I've been in for 2 years. Local prices have held strong and I had an excellent score but it fell through because the companies the bank was going to sell the mortgage to wouldn't accept the comps in the appraisal. I did get back half of my appraisal fee from the local bank but it was a $220 exercise in futility. I live in a rural area and the housing turnover is very small so the comp options are limited, the ski resort nearby is eliminated because it's considered resort property. Our local bank has stopped trying to do mortgages and refinances because they can't get anything through.
Lower interest rates on home loans merely raises the price of the home. The house always wins. Merely to keep the tax base in high gear the government who owns us will prop up real property prices. If they will not let prices drop to true value, we have to go it alone. We have to teach our children to build their own homes. Teach them to buy property outside city limits, buy housing kits that include the lumber, siding, and mechanical parts. I know young couples who have built their own homes from kits using minimal help from friends and officials who come for inspections. If enough people do it, if enough people bypass the local mobs who dominate home ownership with a thousand and one fees, taxes, permits, consultations, estimates etc. then we can get prices down to a level that will all but eliminate homelessness. But it will run lobbyists out of business. We will still have homeless lobbyists. On weekends we can all go out to taunt them and throw tomatoes at them. In a nice way of course!
A few years ago, appraisers did not use foreclosures in their comparables. Now they do - I assume, at the request of the banks. So, you have to stay put until all the foreclosures are sold. I estimate 5 years!! There is no way out for homeowners or banks except to stay put - or Let it be.
I have thought from the beginning of the crisis that no amount of smoke and mirrors was going to make the problem of the burst real estate bubble go away. The ideas to assist homeowners sound so much like the way our federal government does their accounting. If you don't have the money, wave your hands, make promises and hope things will get better. The sad part about this is that the banks had a major hand in driving the market bubble and now they are getting conservative. They simply don't want to establish the market value through refinancing for homes that have lost so much value. Didn't they get a waiver for doing mark-to-market? Anyway, all of the plans for helping homeowners have been posturing, in my opinion. They should leave it alone and let the market settle at a value that is sustainable.
We tried to refinance two times. Both times the refinance fell through because our home assessed at nearly half the price we purchased it for, due in large part to foreclosures in our community, which were used as "compareables" by the inspector.
People whose homes are underwater have the most incentive to refinance, but banks won't budge. And really, I can't blame them, it would be a lousy investment for them. It's a lose-lose situation. Time to accept the new realities and move on (or rather... stay put).
