Mortgage rates remain low again this week helped out by reemerging doubts about the stock rally and economy as a whole. The benchmark thirty-year, fixed-rate stands just above 5% with no points and the fifteen year is just below 4.50%. While paying a point was buying a full ½% discount to the rate in the first quarter of the year, that premium has narrowed significantly and a point today is only buying a 1/4% rate improvement.
As I predicted last week, mortgage rates have managed to ease somewhat over the past week thanks to a slumping stock market that has seen a miserable start to the third quarter. Investors are beginning to think that all of those “green shoots” of economic recovery may have been so many weeds as lackluster earnings reports, a sell off in the commodities markets, and concerns that the third quarter will fail to bring the robust growth many had hoped for are all taking their toll on stocks.
The Dow and S&P 500 both ended the day Tuesday at two month lows. Bonds have benefited from all this uncertainty as investors retreat to the safety of the capital markets and mortgage rates have reaped the reward. The benchmark thirty-year fixed-rate fell below 5.50% to settle in at 5.375% on Tuesday. Remember it was only a couple of weeks ago when we were almost at 6.00%.
Fifteen year mortgage rates fell to 4.625%. There are no big economic reports due out this week and I expect mortgage rates will continue to simply respond to the ups and downs of equities and commodities on a daily basis. With no major market movers, expect rates to remain in the 5.375% range and perhaps ease if the sell-off in stock continues.
I can remember back sixteen years ago when thirty-year mortgage rates fell below 7% sparking a flood of refinances. I also remember 2003 when rates dipped again and another “refi boom” ensued. So with thirty year mortgage rates now at their lowest levels in history, why are we not seeing the kind of refi hysteria we have seen in past? Ironically, the cheap mortgage money of the past that helped drive up homeownership rates and property values has left us between a rock and a hard place. Despite historically low rates, much tighter underwriting guidelines coupled with the crash in home values leaves few borrowers in a position to refinance.
The Mortgage Bankers Association reported on Wednesday that the national average interest rate for thirty-year, fixed-rate mortgages stood at 4.89% at the end of last week, down from 5.07% a week earlier and down from 6.50% in October. Much, if not all, of the decline in interest rates can be credited to the Federal Reserve’s program of buying up to $500 billion in mortgage-backed securities from Fannie Mae and Freddie Mac which started on January 5th. This has narrowed the risk premiums associated with mortgage yields leading to the unprecedented drop in long-term rates.
However, according to Doug Duncan, chief economist for Fannie Mae, only a third of outstanding mortgage debt is eligible for refinancing. “Nearly 70% don’t make the cut,” he said ” because their credit isn’t good enough or they owe more than the current values of their homes.” Another set of homeowners locked out of the refinance opportunity are “jumbo” loan holders whose loan amounts exceed the Fannie Mae and Freddie Mac maximum. Rates on “jumbo” loans have failed to follow the downward trend of conforming loan rates and have stayed stubbornly around the 7% mark.
Mortgage lenders are reporting that while refinance activity is up, only 50% of applicants end up closing due to credit or appraisal issues. In Florida, where home values have fallen sharply, only 25% of refinance applicants make it to the closing table. While Fannie Mae is looking into the possibility of allowing borrowers to refinance up to 120% of the current property value to help more “upside down” borrowers refinance, there is still no viable program in place. So while refinance “booms” of the past allowed a majority of homewowners to benefit from lower rates and monthly payments, along with the relatively cheap access to their home’s equity through cash-out, the only ones benefiting this time around seem to be those who need it least.
Borrowers who have been in their homes for a number of years and have substantial equity along with excellent credit are taking advantage of the lowest rates in history while those struggling in “upside down” mortgages are stuck with their higher rates. A silver lining would be if the rates stay low enough for long enough, borrowers may begin to choose to move up rather than sit tight in their homes. It will be that slow increase in demand that, ultimately, will stabilize home prices and spread the opportunity of lower rates to more homeowners.