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November 2018
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Wall Street Pushing for Home Refinancing Boom

Mortgage rates for a 30-year fixed rate loan are now available at 4.375%, the lowest it has been since Freddie Mac began tracking mortgage interest rates in 1971. But A big reason has to do with the fact that falling housing prices have left many borrowers with little or no home equity, which is also known as being “underwater.” As a result, they can’t qualify for home refinancing. Others are deterred from refinancing by strict lending standards and the high fees that come with it. People continue to seek fixed mortgage refinance loans even if they have negative equity.

To get more mortgage refinancing approved, some respected economists and analysts at firms like Morgan Stanley and Goldman Sachs say the government should encourage a refinancing wave by adjusting lending policies at Fannie and Freddie. The mortgage lenders were taken over by the government two years ago. They own or guarantee about half of all U.S. mortgage loans, or nearly 31 million home loans worth more than $5 trillion. They buy home loans from lending companies, package them into bonds with a guarantee against default and sell them to investors.

The savings from a major mortgage reset could be significant. Allow someone with a $200,000 mortgage at 6% to refinance down to 4.5%, and suddenly there is $3,000 a year available to be plunged back into the economy. Add that up across millions of people, and you have what Morgan Stanley economist David Greenlaw calls a “slam dunk stimulus.” The government is already trying to help borrowers refinance, but its existing programs have failed. The Home Affordable Refinance-Program, or HARP, is directed a homeowners whose loans nearly or completely outsize the value of their homes. The government rolled out HARP in an effort to aid millions of loan refinances, but only a few hundred thousand have been done. The problem is that there are too many restrictions when trying to refinance under HARP. That’s why some people on Wall Street want the government to roll out a less restrictive program to get more mortgages resets done.

Regardless of the pressure coming from homeowners and some on Wall Street for the government to ease refinancing guidelines, Treasury Department spokesman Andrew Williams tells The Associated Press that “the administration is not considering a change in policy in this area.” The government sees where the pitfalls are. Taxpayers have already pumped $145 billion into Fannie and Freddie over this last two years, and widespread refinancing now could raise that burden. Fannie Mae and Freddie Mac would very likely see their earnings decline and write-downs on their home loan securities go up. In total, a giant mortgage reset could cost the home loan lenders $75 billion, according to research from investment firm Keefe, Bruyette & Woods. Let’s also consider that a refinancing boom could have unintended consequences. The reality is that the pace of home foreclosures might not slow. A lower interest rate still might not be attractive enough for borrowers with deeply underwater mortgages to stay in their homes. To some, it is not worth paying any money toward a depreciating asset, regardless of the interest rate.

New borrowers could also face higher mortgage rates. A large refinancing wave would depress the value of mortgage-backed securities, making them less attractive to investors such as pension funds and foreign governments. Weak demand for those securities could lead to higher mortgage rates because lenders could have a harder time selling off their loans to investors. A short-term home refinancing wave could help stabilize the housing market now, but it could also hurt home sales later. Homeowners who are able to lock in a once-in-a-lifetime interest rate could be deterred from moving in the future. Hitting the mortgage refinance button could put more money into homeowners’ pockets today, and would also give the economy a quick jolt. But the ultimate costs are too high.

Suggestions for Fannie Mac Mortgage Reform

Regulatory reform in the mortgage industry is inevitable. The mortgage blogs have been buzzing this week with talks of Fannie Mae and Freddie Mac merging together in an effort to salvage these failing government companies that own 97% of all mortgage notes in America. Even with 30-year fixed rate mortgage programs below 5%, we can’t fix the mortgage mess simply by inducing another refinance boom.

The new Fannie Mac should no longer target low and moderate-income individuals since that replicates FHA’s function. On the path to economic independence, Congress should form a Resolution Trust Corporation type of entity to acquire the new Fannie Mac’s tainted assets. The RTC-type company would dispose of bad credit home loans and real estate acquired through foreclosure. The original RTC was established in 1989 to mop up the assets of failed savings and loan associations. The late Bill Seidman headed it up. He was previously chairman of the Federal Deposit Insurance Corporation under President George H.W. Bush. He adroitly disposed of billions of dollars of assets and returned the proceeds to the Treasury.

The new Fannie Mac will inherit a massive one-to-four unit, home-lending division. That is where most of the tainted assets are. It will also acquire the smaller, multifamily division. Its delinquencies and defaults are more manageable. The skills necessary to underwrite, securitize and service multifamily loans have little in common with mortgage lending. As a result, the new Fannie Mac should spin off the multifamily division into a new company. One company to dispose of tainted assets; another for home lending and a third to make multifamily loans is a rational approach to shrinking the GSEs and returning billions to the Treasury.

The Republican’s GSE amendment calls for repealing Freddie Mac’s and Fannie Mae’s affordable-housing mandate, requiring the companies to shrink their mortgage portfolios, lowering their loan limits and increasing down-payments for home loans. It is unrealistic for that to happen with the GSEs in their present form and while the economic recovery is weak. But the time is right to merge Fannie Mae and Freddie Mac and form three separate companies. That is the best way to lead the GSEs out of federal conservatorship and repay the taxpayers.