Refinances Booming? Not As Much As You Think

Discount all the reports you read about Americans lining up to refinance their mortgages and take advantage of the lowest rates ever. Oh, they’re lining up all right but the majority of their loan requests are getting turned down.

The WSJ has the details, here is an excerpt:

While the low rates haven’t caused a stampede of people seeking loans to purchase homes, they have set off a wave of refinancing applications. An index measuring refinancings is at its highest level since June 2003, according to the Mortgage Bankers Association. At GMAC Mortgage, mortgage applications are up more than 75% in January from their levels two months ago, a company spokeswoman said.

But a large percentage of applications are being turned down. Only about a third of U.S. mortgage debt outstanding is likely to qualify for refinancing, said Doug Duncan, chief economist of Fannie Mae. Nearly 70% of borrowers don’t make the cut, he said, most often because their credit isn’t good enough or they don’t have sufficient home equity. A significant number of homeowners owe more than the current value of their homes, a situation sometimes known as being “under water.” Others can’t profitably refinance, often because they hold jumbo mortgages, those above the $625,000 limit for loans that can be bought or guaranteed by Fannie Mae or Freddie Mac in the highest-cost areas.

“The refinance boom is mostly impacting the people who need help the least,” said Scott Stern, chief executive of Lenders One, an alliance of mortgage bankers. “These are people who have good credit, who have had been in their homes a long time, people who already have conforming fixed-rate loans or government financing.”

Though not mentioned in the article, I suspect that more than a fair amount of those walking away empty handed were the recipients originally of no income verification loans. There are a lot out there that are keeping their heads above water, sometimes barely, but haven’t a chance of qualifying conventionally for a loan. What you do with this group is truly problematic. I suspect that in the end, the government will loosen the underwriting guidelines to let them through. In doing so, they will probably take us right back down the path we just left.

As for those that are underwater, the era of the Fannie/Freddie streamline refi is just around the corner. FHA has for decades allowed its borrowers to refinance without reappraising the house and in fact without any other qualifying criteria save for the need to have been current on the mortgage for the past twelve months. It has actually worked pretty well and there is probably no good reason for F&F not to go there as well.

All of this sounds reasonable but then again no good deed goes unpunished. So while we can probably finagle a lot more people into refis we need to ask the question, “But then what?” For once you start playing around with markets and manipulating interest rates, there are going to be consequences.

The likely downside to all of this is that folks are going to stay in their houses for a very long time. Logically, interest rates are not going to be at this level for an extended period so a lot of these homeowners are going to be quite averse to moving. That will take its toll in labor mobility and it will take a toll on the housing market in general. That market relies on some degree of churn-new homeowners buying the lower priced product and the sellers trading up to higher priced homes-in order to function efficiently. If you provide a big disincentive to move then the dynamics of the market are going to be impacted.

I suspect that long after we recover from the current disaster we will continue to pay small prices here and there for our follies.

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