Realty Check

Record Low Mortgage Rates Don't Matter


Mortgage rates hit yet another record low this week, 4.09 percent on the 30-year fixed, according to Freddie Mac.

This will only fuel President Obama's recent proposal to refinance more Americans into these lower market rates.

Government-run Freddie Mac seems already on board, noting in today's weekly rate report, "The average interest rate of mortgages outstanding in the second quarter was 5.28 percent. By refinancing into today's 30-year fixed mortgage, homeowners could shave almost $1,715 a year in interest payments on a $200,000 loan."

Unfortunately neither Freddie nor the President are mentioning the fact that the majority of borrowers can't qualify or afford to refinance right now. Any new program would have to eliminate fees and do away with loan-to-value ratios, given that 10.9 million, or 22.5 percent, of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2011, according to a new report this week from CoreLogic.

Paul Dales of Capital Economics puts it best:

"The clear problem is that households are not taking advantage of low mortgage rates. Even though 30-year rates have fallen to a record low, the 90 percent gain in mortgage applications for refinancing since April is modest compared with the surges in 2003 (720 percent), 2009 (560 percent%) and 2010 (240 percent)."

Even if a new government refinance program, or changes to the Treasury's current Home Affordable Refinance Program, did away with fees and LTV's, banks would likely not want to take on more risk.

Moreover, weighing the benefits of perhaps 2.9 million refinances resulting in $7.4 billion in savings and 111,000 borrowers averting default (estimates from Congressional Budget Office) against the 4.5 million mortgages currently in default and 2 million more in foreclosure, the latter wins in the need-for-attention and government aid column.

I'd also add Dales' note that on the refi side, "That saving is equivalent to less than 0.1 percent of consumption."

Bottom line, despite record-low mortgage rates, Americans aren't buying enough homes.

That is largely because they can't qualify for those low rates and because they don't want to buy into a housing market that is still depreciating. We need to focus on that, rather than the weekly record rate numbers, which are sounding more and more like a broken record.

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