Realty Check

Why No Refi?


The latest weekly mortgage application surveyreleased today by the Mortgage Bankers Association makes no sense. Mortgage applications fell 4.9 percent overall, with applications to purchase a home essentially flat and applications to refinance down 6.3 percent. The part that doesn't make sense is that refi's have fallen for the second straight week, at the same time that mortgage rates have fallen for the second straight week.

Lower rates usually spur more refi's, not fewer.

The reason we're not seeing a surge is that most people who qualified for refi's, already did when rates went below 5 percent. Now rates flirt around the 4.25 percent area, dipping momentarily, but not long enough for borrowers to pull the trigger and get the biggest benefit. Despite sudden drops in the 10 year Treasury yield, lenders are not rushing to offer super low rates because they don't want a flood of refi's and because they get enough business at 4.25 percent. Right now, without much competition from their peers, lenders don't see it as cost effective to lower rates.

Then there is of course the underwriting issue. A lot of folks simply don't qualify for these low low rates, so the pool of potential applicants is limited.

"Millions of households are missing out on the mortgage bargain of a lifetime because they do not have the credit score or down payment required to qualify for a new loan," writes Paul Dales at Capital Economics.

This is not to say that we haven't seen a huge volume of refinancing over the past year. Refi's rose nearly 43 percent month to month in August and have risen 90 percent since April, according to Capital Economics.

"At first glance that looks impressive," writes Dales. "But given just how far mortgage rates have fallen, it is not a great return." Mortgage rates are down nearly a full percentage point from February.

So how do we get more Americans into lower mortgage rates? Most expect President Obama to announce some kind of refinance plan during his big speech about the economy tomorrow. The running bet is that it will be some permutation of the Home Affordable Refinance Program (HARP) that allows borrowers with Fannie Mae or Freddie Mac loans, who are underwater by as much as 25 percent, to refinance to lower rates. So far this program has processed 838,000 loans, according to MF Global's Jaret Seiberg.

Seiberg estimates that with a few tweaks, they could add twice as many borrowers, but those tweaks will be complicated. First you have to lower the fees, which would hit Fannie and Freddie's bank accounts. "FHFA [overseer of Fannie and Freddie] would need to conclude that the value from the reduced probability of default from the refinancing exceeds the lost revenue from the lower fees," notes Seiberg.

The thought is that they would also expand the Loan to Value Ratio's (LTV's), but Seiberg notes that of the HARP refi's already done, relatively few had LTV's over 105 percent anyway. "We believe lenders are reluctant to HARP a loan if they fear the borrower is so underwater that they might default anyway," says Seiberg.

So could the plan eliminate underwriting on these refi's, since the borrowers would have to be current regardless, and a current borrower doesn't need to be underwritten and re-qualified if they are already paying a higher rate?

"If somebody is current on their mortgage and hasn't missed any payments in the last three years, does it make any difference if you re-equalify them?" asks Guy Cecala of Inside Mortgage Finance. "If they're not in trouble now, and they happen to default in six months, regardless of whether you refi them you're still facing a loss if you're Fannie and Freddie. Theoretically they're less of a risk to you if they have lower mortgage payments."

But a wide-open plan like that could be far to tricky to implement because there's just not enough infrastructure in place to handle the volume.

Regardless, all this refinancing, if it were to happen, in some form or another, would not help the housing market to recover; it might juice the economy a little, putting more spending dollars into our pockets, but it would do nothing to help people in trouble on their mortgages and nothing to spur home buying.

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