The Federal Reserve's latest step to prop up the economy means that 30-year fixed-rate loans are available for less than 4%. But many people are in no position to buy or refinance a home.
The Federal Reserve's latest effort to prop up the economy has dropped mortgages into once unthinkable territory, with 30-year fixed-rate loans available for less than 4% — a record low.
For people lucky enough to still have their credit ratings, bank accounts and home equity in good shape, the change means the opportunity to refinance at rates that once seemed unimaginable.
"I can remember when I thought 7% was a great loan," said Roger Hornbaum, a retired city of Orange employee who has already refinanced his home on California's Central Coast twice since purchasing it last year. "After the news this morning, maybe I'll be getting another call from [my mortgage broker] and be trying it again sometime soon."
Hornbaum's broker, said clients who pay closing costs and a 1% fee to him are refinancing into 30-year fixed-rate loans at 3.75%.
Of course, these days many people are in no position to buy or refinance a home. Many can't meet the stringent lending standards that have prevailed since the housing bust and bank bailout, or they owe so much more than their house is worth that they can't get a new loan at a better rate.
"The phone is ringing off the hook with people who want to refinance," said loan officer Darin Hardin at Premier Mortgage Group in Ladera Ranch. "But the property values just aren't there."
The record low rates are driven by the Fed's announcement Wednesday that it would load up on purchases of long-term government bonds and mortgage securities. The extra demand was intended to drive down long-term interest rates, including those for home loans — and it worked.
The yield on the 10-year Treasury bond, which serves as a benchmark for fixed mortgages, had closed at 1.94% on Tuesday. By the end of the day Wednesday it had dropped to 1.86%, and it plummeted Thursday to 1.72%, setting a record low before rising again Friday to 1.83%.
For a 30-year fixed-rate mortgage, the typical rate for solid borrowers had been 4.09% last week and early this week, according to mortgage finance giant Freddie Mac. That's within a whisker of the record low of 4.08% set in 1950 and 1951. The Fed's action dropped it well into record territory.
Mortgage professionals said many companies were making loans slightly more expensive Friday because their loan pipelines were full of more refinance requests than they could easily handle.
One lender that concentrates on borrowers with solid credit, said on its website Thursday that it could refinance a $300,000 loan on a $450,000 home in Los Angeles County at 3.875% and hand back $3,000 to the homeowner to help with closing costs. On Friday, the rebate on the same loan had dropped to $1,875.
But should the 10-year Treasury yield stay low, there appears to be room for mortgage rates to fall further, industry experts said.
Refinancing mortgages at lower rates should help stimulate the economy by putting more spending money in borrowers' pockets. Lowering the rate on a 30-year $350,000 mortgage to 4% from 5.5% would cut payments by about $3,800 a year.
Mindful of that fact, the Obama administration is trying to encourage greater use of a program that allows borrowers with loans backed by Freddie Mac and Fannie Mae to refinance up to 125% of their home's value. The borrowers must have kept payments current on the underwater loans to qualify.
According to the Mortgage Bankers Assn., more than three-quarters of all home loan applications are now for refinances, although the volume is more of a boomlet than a boom. As rates sank toward 4% recently, borrowers were refinancing their loans at about half the pace seen in early 2009, when rates cracked the 5% barrier for the first time since 1956.
Jay Brinkmann, chief economist for the mortgage trade group, said the torpid housing market had produced few new purchase loans in recent years that would be good candidates for refinancing. What's more, many people already have refinanced at rates less than 4.5% or simply never intend to replace an old loan.
"We'll have to see what happens this week with the [latest big] rate drop," Brinkmann said. "Until a few weeks ago, rates were just back to where they were this time last year."
Meantime, mortgage borrowing to finance home purchases continues to lag despite the record low rates and home prices that in many areas are down more than 30% from their 2006 peaks. Plenty of families are too stressed out financially to buy. Others are leery that housing prices, which rose a bit in the second quarter, could crater again in a double-dip recession.
With a 1-year-old daughter, Joseph and Allison Dillard would normally be prime candidates to stop renting and buy a house.
He is a software engineer and she has a master's degree in mathematics that should allow her to find work when their daughter is older. They have saved enough money for a 20% down payment on a single-family home in Mission Viejo or Laguna Hills, or perhaps a town home in Irvine, she said. And they have been pre-approved for a loan through Hardin, the Ladera Ranch mortgage banker.
Having looked at homes off and on since early this year, the Dillards stepped up the search this month after Joseph settled into a better new job at Google Inc.'s offices in Irvine. But they haven't taken the plunge into ownership.
"The mortgage rates are so low but we're worried, because we don't know much further housing prices will fall," said Allison, 30. "We're trying to gauge the potential risks and benefits."
In any case, the Dillards figure, the economy's precarious state means they'll have at least another year before interest rates rise significantly.
"It doesn't seem like they'll be jumping up any time soon," she said. "So that's not motivating us to do anything right away."
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