01 October 2010

Historic Lows in Mortgage Rates fail to motivate Buyers, Owners

USA Today

Consumers are practically shrugging off the lowest mortgage rates in history.

They have their reasons for hesitating to buy homes or to refinance existing mortgages, freeing up cash to spend:

Eleven million residential properties are worth less than the mortgages on them. Nearly 15 million Americans are unemployed.

Millions more are worried about their jobs; and still more are determined to cut their spending and pay down their debts, ignoring the siren song of cheap money.

For all those reasons — and more — rock-bottom mortgage rates so far are producing surprisingly little bang for the buck across the economy. "Anemic demand continues to hamper real (economic) growth," says housing analyst Robert Andrews of IBISWorld. "The housing market needs to find its true bottom before things can finally turn around."

Home sales, though likely to strengthen after a terrible summer, barely register a pulse even after 30-year, fixed-rate mortgages hit a record low 4.32% earlier this month.

In August, new home sales were running at the second-slowest pace on record and existing home sales were down 19% from a year earlier.

Refinancing, though up since the first half of the year, isn't booming the way it did even last year, let alone in 2003 when homeowners rushed to take advantage of mortgage rates that were more than 1.5 percentage points higher than they are now.

Even those who do refinance are less likely to take out cash or tap savings from lower monthly mortgage payments to splurge on big-screen TVs, trips to Disney World or other indulgences that help crank up economic growth.

It isn't supposed to be this way. When the Federal Reserve and financial markets push interest rates down — as they have with considerable gusto — the housing market and the economy are supposed to perk up. Home buyers shop for houses, then fill them with shiny new appliances. Rising demand for housing arouses the animal spirits of developers who start making plans to put up new homes, buy building materials and hire construction workers. Homeowners refinance and free up cash to spend. Economic growth starts purring again.

Not this time: Not after the biggest housing bust since the Great Depression. Credit is tight. Banks are wary about lending. Consumers are wary about borrowing. The hangover will take some time to cure. "It's going to take about three years to get back to normal," says Patrick Newport, U.S. economist for IHS Global Insight.

Piggy banks, not ATMs

No mistake, low mortgage rates are having some impact. Mark Zandi, chief economist at Moody's Analytics, expects U.S. households to refinance more than $2.2 trillion worth of mortgage debt this year, yielding $20 billion worth of annual savings. "This acts like a tax cut for middle-income households," he says. But homeowners refinanced a lot more — hitting an annual pace of $4.2 trillion — in third-quarter 2003 when 30-year mortgage rates were at 6.06%.

Just three or four years ago, homeowners were using their houses like ATMs, refinancing or taking out home-equity loans to grab cash. In second-quarter 2006, for instance, homeowners holding conventional prime mortgages siphoned $83.6 billion out of their houses by taking out bigger mortgages when they refinanced, according to mortgage giant Freddie Mac. Traditionally, Zandi says, homeowners have divided any savings from refinancing into thirds for increasing savings and paying down debt, home remodeling and consumption. He suspects that two-thirds of any savings is now going toward slashing debt or building savings and a third to consumption. "Not much is going to home improvement," he says.

These days, households that refinance often treat their homes like piggy banks: They're plopping money in and not taking money out. Freddie Mac estimates that they took out only $8.3 billion in the second quarter of this year, down from $21.8 billion a year earlier. Just 27% of households that refinanced Freddie Mac mortgages took cash out in the second quarter of this year (compared with 84% three years earlier); 22% put cash into their homes in the second quarter — the third-highest cash-in rate since Freddie Mac started keeping records in 1985. Sometimes they brought money to the table because their homes were underwater and they couldn't refinance otherwise, says Freddie Mac chief economist Frank Nothaft.

Homeowners are also shortening the terms of their mortgages so they can build equity and pay off their mortgages faster. In the second quarter, 30% of homeowners refinancing 30-year, fixed-rate mortgages switched to 15- or 20-year mortgages, often absorbing higher monthly payments in exchange for owning their homes free and clear years earlier and saving tens of thousands of dollars in interest over the long haul.

"I'm a lot more conservative than I was in my 20s," says Sue Reiss, 38, a global account manager for a manufacturing firm in Wilmington, Del. She refinanced her mortgage and is applying the $150-a-month savings toward paying off her house faster. "Took me about 10 years to pay off my credit card debt and start focusing on putting my financial life in order." She regrets "one too many payments to the credit card company where I couldn't even remember what I bought."

Danny Kofke, a special education teacher in Hoschton, Ga., has refinanced twice since 2006, turning his original 30-year mortgage into a 20-year and then, last year, a 15-year loan. He's paying $90 a month more than he did with his original mortgage — but he'll finish off his mortgage 12 years early at a savings of more than $95,000. The father of two daughters, ages 6 and 3, is preparing for some whopping bills down the road: "I look at the big picture and think how nice it will be 14 years from now when my daughters are ready for college and I have no debt," says Kofke, 34, who earns $39,000 a year and has written the book How to Survive (and Perhaps Thrive) on a Teacher's Salary.

"We've been swamped," says Alan Rosenbaum, CEO of the mortgage firm GuardHill Financial. "We're seeing a huge surge in volume (in refinancing) right now, but we're still surprised we haven't seen more come in." He suspects some homeowners are holding off in the hope that mortgage rates will drop still further.

Many just can't refinance

A bigger factor is likely the lingering impact of the housing bust: Nearly one in four homes with mortgages are underwater — more is owed on the houses than they're worth.

In 2009, the Obama administration introduced the Home Affordable Refinance Program. Under HARP, homeowners can refinance even if their mortgages are 25% higher than the value of their houses. But there are two requirements: Their mortgages must be guaranteed by Fannie Mae or Freddie Mac; and the homeowners must be up to date on their monthly mortgage payments.

But HARP "has been less effective than it could be," Amherst Securities concluded in a report last month. James Lockhart III, then director of the Federal Housing Finance Agency, predicted last year that HARP could help up to 4 million or 5 million homeowners lower their monthly house payments. But fewer than 380,000 had refinanced through HARP by the end of June.

Amherst Securities listed several reasons for the disappointing results: Homeowners with negative equity in their houses are struggling to come up with cash to cover closing costs. The mortgage industry, having cut jobs during the financial crisis, can't handle a surge in refinancing. Mortgage-servicing companies are reluctant to handle home loans originally underwritten by lenders that are now out of business. (Nearly a third of firms that issued mortgages in 2007 have vanished, Amherst notes.)

Brian Roy, 36, a technology manager in Nashua, N.H., gripes that his application to refinance a slightly underwater mortgage through HARP was rejected over a technicality involving mortgage insurance. He suspects the bank just didn't want to lower his interest rate. "I met all the criteria," he says. "They gave me the runaround for a long time. ... From their standpoint, they're probably thinking, 'This guy's paying 6 and a quarter. Why should I lower it to 4 and a half?' "

Across-the-board re-fi plan

Several analysts say the government should do more. William Gross, managing director of investment giant Pimco, caused a stir last month when he urged policymakers to "quickly engineer a refinancing opportunity for all mortgages that are current on payments" and guaranteed by Fannie or Freddie. Gross calculated that turning mortgages now at 5%, 6% or 7% into 4% mortgages could pump up to $60 billion into the economy and lift housing prices by as much as 10%.

"Whether it's above water or below water, it's the same house," Gross said in an interview. "There would be fewer foreclosures. There would be fewer defaults. There would be fewer empty homes. ... You'll improve the quality of the houses by keeping people in them rather than forcing them to leave."

Morgan Stanley economist David Greenlaw earlier called such a move "slam dunk stimulus."

And economist Mark Thoma of the University of Oregon said the plan would be popular politically because it "helps the people who behaved well, not the people who screwed up and got a bad mortgage."

Many mortgages are packaged into securities and sold to investors, not held by the lenders that originated them. Gross cautions: "Refinancing is not win-win. There are very vested interests, powerful interests that own these mortgages and would prefer they not be refinanced." In fact, Pimco itself, which owns tens of billions in mortgages, would take a hit if the government carried through on Gross' plan.

Michael Fratantoni, vice president for research and economics at the Mortgage Bankers Association, called the massive refinancing plan for Raleigh homes a "non-starter. ... It would involve breaking a contract with the investor who's holding the existing mortgage." And so far, the Obama administration has shown little interest in pursuing it.

So for now, the economy is contending with a shortage of consumers like Paul Kaye, 60, a civil servant in Sarasota, Fla., who refinanced two months ago and cut his monthly mortgage bill by more than $800.

"Ahh, you ask what am I doing with the extra dough," he says. "We're eating a little better. The house is a little cooler. After a while, it just seems to get eaten up in the budget. I would like to say I'm socking it away in my 401(k) or saving it for our next world cruise, but that ain't happening."

No comments:

Post a Comment