Realty Check

Rising Rates Threaten Refi Plans

One weekly report does not a trend make, but today's mortgage application surveyshould serve up a good dose of reality to all of those state attorneys general and Obama administration officials touting a grand new refinance program for underwater borrowers.

Take a look at this chart of weekly interest rates on the 30-year fixed vs. weekly refinance applications:

Interest Rates vr. Refinancing

Rates dropped to record lows a month ago, and while more borrowers went to refinance, the volumes were still very low. Then, more recently, we see basically a quarter point rise, and refinances fall off a cliff. The goal of the refinance proposals (which I discussed in yesterday's blog) is to get the allegedly 3/4 of underwater borrowers with above-market mortgage rates (about 8.9 million according to CoreLogic) a break on their monthly payments. This would supposedly lessen the threat of default as well as add much-needed spending power back into the economy.

Tooga | Stone | Getty Images

But with mortgage rates rising again, how much of a bang for the buck will banks and the administration get out of these refi programs?

Well let's look at what's pushing rates up:

"First, Europe’s alleged debt bomb solution is pulling dollars out of Treasuries resulting in rising Treasury rates .. and mortgage rates," says Dr. Anthony Sanders, Professor of Finance at George Mason University. "Second, FHFA [Fannie and Freddie's regulator] is increasing Guarantee Fees for Fannie and Freddie loan purchases/insurance which adds to the mortgage rate. Third, mortgage rates have a risk premium component that follows the VIX (CBOE Volatility Index on the S&P500 ). And under just recently, the VIX has been rising."

That basically means that any benefit of these so-called "streamlined" refis by Fannie and Freddie or by a bank/AG settlement, "will have small impact and less desirability for the consumer," adds Sanders. That is if those borrowers can actually qualify.

On the other hand, Guy Cecala of Inside Mortgage Finance, argues that the bulk of the borrowers targeted by these refi plans have interest rates between 6 and 7 percent now. "I think the idea is that the group of borrowers the administration/AGs are looking at haven’t been able to refi for several years and would greatly benefit even if they “only” got a FRM at 5 percent. So relatively small changes in rates don’t impact the overall goal."

I realize that the weekly refinance applications numbers from the Mortgage Bankers Association largely chart borrowers who are not underwater on their current loans, and the refi programs target those who are underwater. Still, rates have every reason to climb, especially with new lower conforming loan limits and the potential for more risk retention by lenders coming down the pike. The resulting refis could end up offering savings of less than $100 a month, given the likely loan sizes that will qualify...which leads me back to my original premise:

The administration's refi proposal is more politics than substance, and this latest AG/bank settlement proposal is just plain baffling, because what does refinancing current borrowers have to do with justice and restitution for borrowers whose foreclosure paperwork was mishandled?

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