Mortgage Rates Are Low But For Many Refinancing Is Impossible

Several years ago pretty much anyone could get a loan to buy a house or to refinance their existing mortgage. As long as you walked through the doors on your own accord and didn’t bark like a dog, you got the loan. If your credit score was 500 and you needed to borrow 85% of the value of your home, you got the loan; job or no job. One way or another your lender would make it work; not so today.

Mortgage rates have dropped to their lowest levels since the 1940’s, thanks in part to a trillion-dollar intervention by the government. Still, those same banks that were so free with their money four years ago are now becoming tight-fisted. Fearful and limping, lenders are now imposing such stringent requirements on borrowers that many homeowners are locked out.

It is estimated that 6 out of 10 homeowners have mortgages much higher than the current rate of 4.8% for a 30-year fixed loan. The total dollar volume of refinancing will be about $1 trillion. In 2003 when rates were falling as well, the total dollar volume that year was a $2.8 trillion. The Government has succeeded in driving mortgage rates down to the lowest level seen in our lifetime, yet people cannot take advantage of it.

It is highly unusual for mortgage money to be below 5%. Average rates fell to as low as 4.7% in the 1940’s as the Government held down rates to finance World War II and stayed just below 5% until the early 1950’s. In 1952 rates went above 5% and stayed above until this year. This should be a grand slam for borrowers and lenders, but it is just not playing out that way.

Super low rates are soon going to be a thing of the past though. The Federal Reserve program that has driven rates so low consisted of purchasing $1.25 trillion in mortgage backed securities. That program will end in March of 2010 and is not going to be renewed, says the Federal Reserve. Some analysts believe mortgage rates could jump as high as 6.0% in the spring, and that would cost an extra $225 on a $300,000 loan.

Recently the Federal Reserve conducted a survey of lenders and found they are still tightening terms for small businesses and household loans. The banks surveyed said they are under a lot of pressure from regulators to raise their cash reserves which means fewer loans. Lenders are looking at the value of the collateral and the credit of the borrower more intently now. Borrowers contend that more loans now may keep many people out of foreclosure which will hurt the banks down the road.

So what is the answer to the mortgage crisis problem in this country? I just don’t see banks here stepping up and taking on any more risk. Banks and lenders have been badly hurt and are still struggling to keep their head above water. I am not sure creating legislation to make them take more risk is the way to go.

In the UK a few companies have taken matters into their own hands and are offering to refinance people out of their adjustable rate loans and into fixed rate loans. That is not so remarkable until you take into account the type of borrowers that are taking advantage of this. These lenders are actually catering to borrowers who are upside down in their current mortgage, which is also about to reset. Lenders are refinancing borrowers who have to borrow up to 120% of the value of their house, not something you will find here in the states. Should we back legislation that allows judges to magically wipe away millions in debt just so borrowers no longer owe more than the value of their house?

What happens to the bank that has millions of dollars owed to them from borrowers and suddenly the slate gets wiped clean? If you loan someone a hundred bucks you expect him to give it back at some point in the future. Is it fair to have his uncle pop in and go, hey Jon here no longer owes you a hundred bucks. He is kinda broke here so we will cut down his loan to fifty bucks that way he will be able to make the payment. So who is going to eat the losses when millions of dollars are wiped away from banks books? Won’t this just add to their financial woes?

That sounds great for the borrower, but may not be in our country's best interest; or maybe it is…

Good Luck and Happy Borrowing.