Refinancing unavailable for many borrowers

NEW YORK – Feb. 16, 2010 – The refinancing wave that swept the nation when mortgage rates hit historic lows last year is petering out, leaving behind millions of homeowners who could not qualify for the best rates.

Half of the nation’s borrowers have mortgages with rates above 6 percent even though the average rate on 30-year, fixed-rate mortgages has been about 5 percent for most of the past year, according to research firm First American CoreLogic.

More refinancing activity would have helped household budgets, but also the national economy because homeowners might have spent some of the extra cash they pocketed, giving the recovery an added lift.

Many borrowers who tried to refinance have found they’re stuck because the value of their homes has tumbled and their equity has melted away. Others have been shut out because lenders tightened their requirements, demanding stellar credit and low debt.

An effort by the Obama administration to overcome some of these challenges has fallen flat, frustrating many homeowners – especially with mortgage rates expected to rise by year’s end, if not sooner.

“We’ve reached the point of burnout,” said Amy Crews Cutts, deputy chief economist at Freddie Mac. “Most of the people who can refinance today have done so already.”

Usually, borrowers refinance if they can save at least one percentage point on the interest rate, mortgage experts say, and even a savings of as little as half a point may make sense under some circumstances. Ultimately, the decision depends on whether the savings come in a time frame that makes sense for the borrower.

Elaine Lewis and her husband are among those who were shut out. They could not refinance their Silver Spring house this month because it was appraised at $448,000 – $60,000 less than they paid in 2004. They still have equity in the house. But because that equity is less than 20 percent, they are required to pay private mortgage insurance.

As they see it, their options are to pay the mortgage insurance and related upfront costs or come up with enough cash to pay down their principal, beefing up their equity so insurance won’t be necessary.

“Neither of those choices made financial sense since people refinance to save money, not to spend money,” Lewis said. “It was terribly disappointing.”

Other borrowers have no equity, or they owe more than their homes are worth, making it nearly impossible to refinance. These “underwater” borrowers make up about a quarter of all households now that national home prices have plunged an average of 30 percent from their peak in 2006.

Refinancing activity took off after the Federal Reserve committed to buying a huge chunk of mortgage-backed securities in late 2008 to help loosen consumer lending. Mortgage rates immediately dropped below 6 percent and stayed there through 2009. They dipped below 5 percent last spring, and then hit an all-time low of 4.71 percent in early December, Freddie Mac reported. They have hovered around 5 percent since.

Freddie Mac estimated that 5.8 million borrowers have refinanced since the start of 2009, saving $140 a month on average.

The flurry of activity came nowhere close to matching the unprecedented refinancing boom in 2003, when rates dropped below 6 percent for the first time in decades. The economy was flourishing, and home prices were rising.

“But context is everything,” said Cutts, of Freddie Mac. “In many ways it’s surprising that with the financial markets in disarray and home prices falling across the country and eight-million-plus jobs lost that we’d have people taking out new loans in 2009.”

Still the numbers are not as impressive as they could have been, many economists said.

“There are quite a few mortgages that are in the money, meaning they are well within the zone where refinancing makes sense,” said Sam Khater, a senior economist with First American CoreLogic. “Given where rates are right now, refinance activity should be quite a bit higher than it is.”

If the bulk of those people were to refinance, that would goose consumer spending, giving the wider economy a boost. Instead, refinance activity has dropped 60 percent from its peak in the spring, according to the Mortgage Bankers Association. This year, refinances should total $500 billion of all loan originations, down from $1.4 trillion last year, the group predicted.

Larry F. Pratt, chief executive of First Savings Mortgage, said he has witnessed the challenges up close. “Historically, our rejection rate is less than 5 percent of all our refinance applications,” Pratt said. “For 2009, it was nearly 25 percent.”

To help borrowers, the Obama administration launched the Home Affordable Refinance Program nearly a year ago. The initiative aimed to help refinance the loans of borrowers with little or no equity in their homes but who are on track with their mortgages. These underwater borrowers are at greater risk of foreclosure, and the administration hoped that lowering their payments would decrease their chances of falling behind.

The program was limited to borrowers whose loans were backed by mortgage financiers Fannie Mae and Freddie Mac. Originally it targeted borrowers whose loan balances were slightly higher than the property’s value. The program was later expanded to include borrowers who owe up to 25 percent more than their homes are worth.

Yet fewer than 200,000 borrowers have refinanced through this program since its launch in March – nowhere near the up to 5 million the administration projected to reach by June, when the initiative is to end. A Federal Housing Finance Agency official said refinancing under the program picked up in the final months of last year. Treasury officials have said the initiative has helped many borrowers.

Some people probably abandoned it for a separate government-led program that also aimed to prevent foreclosures but offered even lower rates, according to housing advocates. But the refinancing initiative was also dogged by delays as lenders struggled to update their computer systems to accommodate the program. Another obstacle was that many homeowners have second mortgages or private mortgage insurance, which can get in the way of refinancing a primary loan.

Thomas Fox, a well-paid government contractor with excellent credit and relatively little debt, should have been the perfect candidate. He made a 17 percent downpayment when he bought his home in Ashburn in 2007. Now he owes at least 5 percent more than the house is worth.

Fox tried to refinance under the federal program, but his private mortgage insurance policy could not be reissued on a new loan, said his mortgage broker, Devon Segal of Apex Home Loans.

“If the government’s program won’t work for this guy, someone with great credit scores and a strong income,” Segal said, “it won’t work for anybody.”

Copyright © 2010 washingtonpost.com.