A Rush Into Refinancing as Mortgage Rates Fall

The housing market may finally be getting some relief, with lower mortgage rates already encouraging refinancing and Treasury officials considering ways to entice new buyers.

Last week, the Federal Reserve announced that it would buy $500 billion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Mortgage rates immediately dropped, and that led to a surge in mortgage refinancing activity for the week — even with the Thanksgiving holiday.

On Wednesday, people close to the discussions said that the Treasury had been talking with Fannie Mae and Freddie Mac about ways to drive down mortgage rates to as low as 4.5 percent. That rate is about a percentage point lower than the going rates for such loans.

Any government efforts to jump-start the housing market have a number of obstacles, the biggest being borrowers’ worries that the economic downturn will affect them. Meanwhile the best interest rates will go only to borrowers in sound financial shape. And even if the efforts go as planned, they may not help the most distressed homeowners.

Still, the jump in refinancing activity showed that there was an appetite that could be whetted by lower rates. The Mortgage Bankers Association said its refinance index, which measures refinancing activity, tripled to 3,802.8 last week from the week before. The index was also 37.7 percent higher than in the same week a year ago. It was the largest increase in refinance applications in the survey’s 18-year history, though it does not measure how many applications become loans.

Refinancing activity accounted for 69.1 percent of all mortgage applications submitted last week, up from 49.3 percent the week before.

“We did quadruple our normal volume last week,” said Bob Walters, chief economist of Quicken Loans. “We had loan officers staying past midnight to get back to all of the people that had been calling. There is still a silent majority of people who can refinance and qualify.”

Callers cited a variety of reasons for their new interest in refinancing, mortgage lenders said. But the main reason was that they wanted to lock in a lower mortgage rate and reduce their monthly costs in case they fell victim to the economic downturn. Others were looking to extract cash to pay down more expensive credit card debt, the lenders said, and some were trying to trade in their adjustable-rate mortgages for a fixed rate.

Annie Lu, 30, a nurse practitioner, said she called about refinancing when she heard that the economy was officially in a recession. She and her husband bought their house in Brooklyn about three years ago with a mortgage rate of 6.25 percent. She is hoping to qualify for a rate almost a percentage point lower. “It is good to prepare for the worst, and nobody minds saving as much as we can,” she said.

The Treasury’s consideration of additional efforts to breathe life into the housing market was first reported on The Wall Street Journal’s Web site. People familiar with the Treasury’s plans said that Treasury officials had met with top executives at Fannie and Freddie last week but that neither had been notified that any steps were taken toward putting such a plan into effect. By one account, the new program would be available only to home buyers, not to people who simply want to refinance their existing loan at a lower rate.

But those looking to refinance are already eyeing the lower rates. “Borrowers with reasonably good credit and a home that hasn’t lost too much value are going to find mortgage money plentiful and readily available,” said Brad Blackwell, national sales manager at Wells Fargo Home Mortgage.

As rates drop, more people, in theory, qualify for loans because their monthly principal and interest payments will be lower. But to qualify for the best rates, borrowers need to have impeccable credit — or a credit score of 720 or higher — as well as at least 10 to 20 percent of equity in their homes.

And while experts said they were heartened by the pickup in activity, the overall number of refinancings this year was expected to be only slightly more than a quarter of the volume at the height of the housing boom in 2003.

“It is not going to spike up rapidly or anywhere near as it has in the past because credit is still tight, the economy is still weak and there are fewer people that could refinance now than could before,” said Celia Chen, senior director of housing economics at Moody’s Economy.com. “But the decline in rates will help those that can.”

For all the renewed interest in refinancing, about 12 million households, or 15 percent of owners of single-family homes, are not eligible. Their mortgages exceed the value of their home, Ms. Chen said.

Meanwhile, entire categories of loan products have been eliminated. Subprime loans are not available along with stated income loans, where borrowers do not have to fully document their income. That has limited the options for many small-business owners and other self-employed individuals. People with inconsistent or unpredictable incomes, like those who rely on commissions, are also affected.

“You can imagine how many inquiries we get where we are done just as soon as we are done talking,” said Rick L. Dunham, vice president of Impact Mortgage Network in Mesa, Ariz., whose clients include small-business owners as well as individuals whose mortgages exceed the value of their home. “So we go to the next step and say, ‘O.K., your options are loan modification, short sale or nothing at all.’ ”

Credit standards have also tightened, which has made it more expensive — often prohibitively so — for many individuals to get a loan. Generally, individuals need a credit score of 620 to qualify for a loan, but they have to pay a fee equivalent to about 2.75 percent of the loan amount, which can translate into a rate of about 1 percentage point higher than the best rate available. In some cases, these individuals can get a better deal through the Federal Housing Administration.

“For borrowers on the fringe — low credit score, erratic documentation, high debt loads, et cetera — mortgage money may actually be available but the other terms and conditions that need to be jumped to have access to that financing make it prohibitive,” said Keith Gumbinger, vice president of the financial publisher HSH Associates.

Javier and Irina Lattanzio were motivated to refinance by the potential for monthly savings. Their strong credit history enabled them to refinance the $800,000 mortgage on their four-bedroom Manhattan apartment to a rate of about 5.6 percent. But the Lattanzios had to pay $70,000 so that their loan would qualify for conforming mortgage rates. Jumbo mortgages remain, on average, a full percentage point higher.

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Source: NY Times