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?