Borrowers Miss Out on Billions in Savings By Nick Timiraos Wall Street Journal 03-02-2010

Borrowers Miss Out on Billions in Savings By Nick Timiraos Wall Street Journal 03-02-2010

Borrowers Miss Out on Billions in Savings
By Nick Timiraos
The Wall Street Journal
March 2, 2010

The Federal Reserve has pushed mortgage rates to near half-century lows, but millions of U.S. homeowners haven't benefited from that because they can't—or won't—refinance.

Falling home prices have left many owners with little or no equity, making it harder to qualify for refinancing. Moreover, stricter lending standards and higher fees by banks and mortgage giants Fannie Mae and Freddie Mac and declining incomes have made it tougher and less attractive for borrowers to seek new loans.

Around 37% of all borrowers with 30-year conforming fixed-rate mortgages—who collectively hold about $1.2 trillion of home loans—have mortgage rates of 6% or higher, according to investment bank Credit Suisse. Many could reduce their rates by a full percentage point if they refinanced at current rates, about 5%. More than half could lower their rates nearly three-quarters of a percentage point, according to Credit Suisse.

But new refinance applications in January stood near their lowest levels in the past year. Weekly data compiled by the Mortgage Bankers Association also show that refinance activity has been muted, considering that rates are so low.

"Traditionally, these borrowers would be aggressively refinancing," said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse.

One indicator of the economic impact of refinancing: Loans that refinanced in 2009 will result in $3.4 billion in savings for consumers this year, according to a report by First American CoreLogic, a research firm based in Santa Ana, Calif. That will return an additional $17.2 billion in savings to borrowers over the next five years. That's money consumers can potentially use to help spur economic recovery.

About a quarter of all mortgage holders are "underwater"—they owe more on the house than it's worth—which normally makes it impossible to get refinancing: Banks want collateral to back the value of home loans they make. The Obama administration recently extended a program intended to help underwater homeowners refinance, but few people have tapped it so far. The program has faced logistical hurdles, delays and confusion from brokers and lenders.

Some people are so far underwater, refinancing ends up being out of the question. John Albright, a retired Navy officer in Manassas, Va., hasn't been able to refinance because the value of his home has plunged. He figures its market value is now around $275,000, but he and his wife still owe more than $500,000 on their mortgage.

Their refinance application was turned down last year because they lacked equity in the home. He says his lender told him he could refinance only if he could come up with about $200,000 to pay down his mortgage. So they are stuck with an interest rate of about 6.5% at a time when his wife's income has declined. "We're going from paycheck to paycheck, but what can you do?" Mr. Albright says.

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."

The higher fees and tight credit standards show the tensions facing Fannie and Freddie. As the government-controlled companies try to raise revenue to offset their losses, those efforts can conflict with their basic public-policy mission: to help stabilize the housing market.

Fannie and Freddie have to strike a balance between risk and access to credit. Figuring out "where that line is involves some trade-offs," said Edward DeMarco, acting head of the Federal Housing Finance Agency, which oversees Fannie and Freddie.

The last time mortgage rates were at current levels, in 2003, refinancing activity hit $2.9 trillion, according to trade publication Inside Mortgage Finance. Last year, refinance volume reached $1.2 trillion, the highest amount since 2003 but not nearly as much as expected, considering how low interest rates have fallen.

Traditionally, borrowers have an incentive to refinance when they can reduce their mortgage rate by one percentage point or more.

Borrowers who are refinancing tend to be those who need it least. Fannie and Freddie refinanced 4.2 million borrowers last year. On average, borrowers who refinanced through Freddie Mac saved $2,600 annually. But the savings on the whole have gone to "very, very good credit borrowers and it really isn't going very far down the credit spectrum," said Michael Fratantoni, the head of research and economics for the MBA.

The experience of Connecticut resident Cathy Grandahl shows some of the trade-offs borrowers must grapple with in today's low-interest-rate, high-fee environment. She wanted to refinance two loans on her West Simsbury, Conn., home: a fixed-rate mortgage with a 5.75% rate and a second mortgage with an adjustable rate that she worries will rise sharply in coming years.

Refinancing would save them around $125 a month on their first mortgage while providing a fixed rate on their second loan. But extinguishing that mortgage by refinancing into one larger loan—considered a "cash-out" refinance—would trigger an additional fee. That, plus several thousand dollars in closing costs, ultimately persuaded the couple not to refinance after all.

"It's not a matter of our credit. We just can't get a good enough rate to make the refi worth it," says Ms. Grandahl, a 53-year-old land-records researcher who has three children in college.

Her broker, Michael Menatian, said that sort of scenario "happens all the time" with qualified borrowers. "There's nothing wrong with these people—good equity, good income—and you have to tell them, 'I'm sorry, I can't give you the low rate you thought you could get.' "

Falling home values are one of the biggest factors raising borrowers' refinancing costs. Borrowers with less than 20% equity may have to pay for mortgage insurance.

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.

The administration says it is also considering new ways to allow distressed homeowners to refinance through the Federal Housing Administration.


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Enjoyed reading the post. Good time for those who buy now and refinance later than those who had a property and than try to refinance to lower their interest but end up owing more to the lender. Tough moments for some but opportunity for others.

Mean Street: Don’t Be Brainwashed by the Housing Cult

Also related to the article is this article found at:

By Evan Newmark

It’s one of my favorite truisms that you can never be too cynical about Wall Street or Washington.

But after watching Bob Toll, CEO of Toll Brothers on CNBC this Monday, I’ll be adding home builders to that esteemed list.


Every CEO talks his own book, but few do it like the home builder CEOs.

On CNBC, Toll was at it again, exhorting the Fed to keep pumping billions into housing because new home construction “employs through direct and corollary basis about 20-25% of all the jobs in the country.”

That’s right. Bob Toll apparently thinks 30 million Americans derive their daily wage from the home building industry.

But here’s the thing. Bob Toll is wrong. That number is wrong. And our nation’s ongoing obsession with new home construction is also wrong.

It’s time for America to find itself a new economy.

Now, I’m not saying that housing doesn’t matter to the economy. It matters a lot. Home prices keep everything from bank balance sheets to consumer confidence afloat. Without the TARP or the Fed tossing us a $1.25 trillion mortgage life raft, we’d all be drowning right now.

But building new homes is a different matter. Yes, it can quickly create jobs, wages and profits, but it can just as quickly take them away. Just ask the residents of Las Vegas or South Florida.

I was curious to see just how “essential” homebuilding was to the current U.S. economy, so I did a little homework with government figures and the excellent Calculated Risk blog And here’s what I found:

Currently U.S. GDP stands at around $14.5 trillion, yet residential construction spending accounts for only a measly $270 billion.

According to the Bureau of Economic Analysis, just 2.5% of GDP in 2009 was directly attributable to homebuilding (defined as “residential gross private domestic investment”). Even in the subprime glory days of early 2006, that figure never went above 8% of GDP.

So how does Bob Toll attribute a quarter of all American jobs to homebuilding?

Even if I threw in every mortgage broker and Home Depot checkout clerk with a generous definition of a “direct and corollary” job, I can’t get there.

Toll’s comment reminds me of the “millions of Midwest jobs” that our nation would supposedly lose if Detroit went belly-up. If I was from the Midwest, I may have actually believed it.

But the old ways of thinking about the U.S. economy die hard.

Even here at the WSJ, we play up every new release of “new home starts” and “permits for new construction.” And Wall Street still picks through the words of homebuilder CEOs like Bob Toll and Ara Hovnanian like tea leaves.

But real estate speculation – and by extension home construction – are no longer at the center of our economy. At $16 billion, the combined market cap of the top five U.S. homebuilders is less than the market cap of Adobe Systems. And that’s a good thing.

The U.S. economy is in transition, reconstituting itself into something that isn’t yet clear. But here’s what is clear: we just don’t need many new homes.

Consider the following. The U.S. has about 131 million housing units (homes, apartments, the works). Of that only 112 million are occupied. That means 19 million or a staggering 14.5% of all available housing is empty.

Yes, there are homes in cities like Detroit that no one will ever want. And yes, only 2.1 million of the vacant properties (1.6% of the total) are “officially” for sale.

But the 2.1 million “for sale” figure is severely understated. There are another 7.8 million U.S. households who are either behind on their mortgage payments or in foreclosure. Several million of those homes will be on the market soon enough.

It seems that the only Americans who really need more new houses are the American home builders.

New home sales in January fell to an annual run rate of 309,000 units. That’s off almost 80% from its peak in 2005 and 2006. Even if new home sales are now flattening out, the prospects of a sudden big rebound seem close to nil. There’s simply too much supply.

And that’s why Bob Toll goes on CNBC and why he and his fellow home builders will continue to push for first time homebuyer credits and for Fannie, Freddie and the FHA to churn out the mortgages.

The real estate bust of the past few years may have brought America to the brink. But to the homebuilders, we’re just now coming to the end of a very bad cycle in a notoriously cyclical business.

Just check out page 38 of a recent Toll Brothers investor presentation announcing “Record Housing Demand Projected for the Next Ten Years” and you’ll see exactly what I mean.

For Bob Toll and the rest of our nation’s home builders, the spring selling season is just around the corner! America will always need more homes – especially when the U.S. taxpayer is footing much of the bill.

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