Low Interest Rates Not Good News For All

Mortgage interest rates are the lowest they have been in a generation. Even the indexes that many adjustable-rate mortgages are tied to are down. For many, this is excellent news. But for those in the biggest trouble, great rates aren't enough to solve their problems.

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ROBERT SIEGEL, host:

From NPR News, this is All Things Considered. I'm Robert Siegel.

MELISSA BLOCK, host:

And I'm Melissa Block. Mortgage rates are the lowest they've been in a generation, even the indexes behind many adjustable-rate mortgages are way down. For potential buyers and homeowners who can refinance, this is welcome news. But for owners in the biggest trouble, great rates aren't enough to solve their problems, as NPR's Tamara Keith reports.

TAMARA KEITH: In recent weeks, mortgage applications have risen sharply, and the bulk of those applications came from people refinancing their loans. Interest rates are right around five percent, and for some, getting a new cheaper mortgage will mean a savings of hundreds of dollars a month. It's prime time to refinance if you can, says Guy Cecala, publisher of Inside Mortgage Finance.

Mr. GUY CECALA (Publisher, Inside Mortgage Finance): Generally, the people who are going to find it easiest to refinance are the ones with equity in their house, good credit profile, and not the majority of borrowers out there. Certainly, it's not going to do much to help the borrowers who are facing foreclosure.

KEITH: And these low interest rates aren't going to do anything for the 18 percent of homeowners who are now under water on their loans. According to data from First American Corelogic, as of November, 7.6 million households owed more than their homes were worth.

Mr. LENARD DARSEY(ph): Our house was worth $246,000 at one time, and it's $172,000 now.

KEITH: Lenard Darsey lives in Arvada, Colorado with his wife and teenage daughter. About three years ago, they were in a tough spot and they refinanced their home to pull a little equity out and pay some bills.

Mr. DARSEY: I asked for a fixed rate-loan and was told I couldn't and - said don't worry about it, in a couple of years you'll be able to refinance. Well, we all know now that that isn't true.

KEITH: Now Darsey is stuck in an adjustable-rate mortgage paying nine percent interest. He and his wife have good jobs and good credit scores, and all they can do is look longingly at five percent interest rates on 30-year fixed mortgages. No one will give them a loan because they owe $50,000 more than their home is worth.

Mr. DARSEY: I am on the Titanic watching it sink. I don't even have a life boat. I'm with the band. One last time, guys.

KEITH: There's a small consolation for Darsey and others in his position. It's possible his monthly payment will come down a bit because the interest rates that most adjustable loans are indexed to are falling. Again, Guy Cecala.

Mr. CECALA: Prime rates low, all the indexes on mortgages are low. They're certainly as low as you could expect them.

KEITH: Michael Devlin is a mortgage broker with George Mason Mortgage. His own home is financed with an adjustable mortgage tied to rate known as the LIBOR.

Mr. MICHAEL DEVLIN (Mortgage Broker, George Mason Mortgage): Right now if my mortgage recasts, my interest rate will drop. The low - lower interest rates in the T-bills, the LIBORs, those are all going to have a positive effect as long as they stay down low.

KEITH: Devlin's interest rate has already dropped once. But for some people, falling interest rates won't be enough to save their homes. During the boom years, hundreds of thousands of people got subprime loans that had teaser interest rates. Those lower rates were locked in for two, three, five years. Some borrowers didn't even have to pay down their principal during those years, but when the introductory period ends, payment shoot up. Paul Lenard with The Center for Responsible Lending says lower interest rates aren't going to be enough to offset what happens when teaser rates end.

Mr. PAUL LENARD (The Center For Responsible Lending): The lower interest rates are going to provide a small amount of relief for a small number of borrowers but it's not going to address the imminent wave of foreclosures that's still coming down the road.

KEITH: So when it comes to falling interest rates, it seems the people in the biggest jam may be out luck. Tamara Keith, NPR News, Washington.

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When Is The Right Time To Buy Or Refinance?

A sign touts a price cut for a Miami house in January. i

Housing prices in major markets could drop as much as 15 percent this year, predicts Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. A sign touts a price break for a Miami property in January. Joe Raedle/Getty Images hide caption

itoggle caption Joe Raedle/Getty Images
A sign touts a price cut for a Miami house in January.

Housing prices in major markets could drop as much as 15 percent this year, predicts Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. A sign touts a price break for a Miami property in January.

Joe Raedle/Getty Images

Mortgage rates are falling below 5 percent since the Federal Reserve started buying mortgage securities to get potential homeowners to go house hunting.

Last week, the Fed started buying up $500 billion of mortgage-backed securities and it plans to do so until June. With the move, mortgage rates continue to drop to historic lows. The government hopes such low rates will spur action from both potential homebuyers and existing ones looking to save on monthly payments by refinancing.

The government made the move after cutting the federal funds rate in December to a range between zero and 0.25 percent, the lowest rate in history. With the Fed rate so low, the central bank couldn't cut it any further, so it laid out other tools to jump-start the economy — such as buying up mortgage-backed securities.

For a 30-year fixed-rate mortgage, average interest rates were 5.07 percent last week — close to the lowest they've been in nearly two decades, according to weekly figures put out by the Mortgage Bankers Association. In June 2003, the rate hit 4.99 percent, the association said. The rate as reported last week by Freddie Mac was 5.01 percent, the lowest in its recorded data since 1971.

Existing homeowners are rushing to lock in good rates. The bankers association has reported a surge in mortgage applications — especially in refinancing applications — in the past few months.

So is now the time to buy or refinance? Experts say that if you have enough equity in your house, it may be time to refinance. But if you're looking to buy — especially in markets such as San Diego or Washington, D.C., which saw some of the biggest price jumps during the housing boom — it might be worth it to wait a few months. Interest rates probably will stay low and housing prices likely will continue to fall.

Why are mortgage rates falling?

Mortgage rates started to fall on Nov. 25, when Fed Chairman Ben Bernanke announced the central bank would buy $500 billion worth of long-term securities to drive down yields on long-term Treasury bonds. The interest rate for a 30-year fixed-rate mortgage is typically in line with the yield on a 10-year Treasury note, so mortgage rates began to fall in response to the Fed's move.

When the Fed cut its federal funds rate in December to a record low of nearly zero, it said it would consider buying even more long-term mortgage-backed securities, which could continue to drive down rates. The Fed started buying up $500 billion worth of the securities last week.

Are interest rates likely to drop further? Or should those looking to refinance grab these low rates now?

The rates may continue to drop, because the Federal Reserve is buying more securities and will continue to do so until June.

But for those interested in refinancing, it may be time. Historically, 30-year mortgage rates have been about 150 basis points above the yield on the 10-year Treasury note. On Monday, that yield was 2.4 percent. Add 150 basis points to that figure, and you would get a mortgage rate of 3.9 percent. But right now, the spread is closer to 270 basis points, with rates at 5.1 percent, according to bankrate.com. Such numbers suggest that interest rates have further to fall to close the spread, says David Kittle, chairman of the Mortgage Bankers Association.

In the past two months, that spread has already narrowed. Even if rates fall further, they are near historic lows, so it still is a good time to lock in a rate. "If you get greedy over an eighth or a quarter [of a percentage point for interest rates], it always turns around and bites you," says Kittle, who is also executive vice president of Louisville, Ky.-based Vision Mortgage Capital.

"I don't see a downside to refinancing," adds Dean Baker, co-director for the Center for Economic and Policy Research in Washington, D.C., who warned about a housing crash years before it happened. He notes, however, that people whose houses have experienced steep drops in price may not have enough equity in their homes to refinance.

What about buying?

There are wide-ranging opinions on this.

The risk in buying a house is that the market may not have hit bottom. The U.S. is in a recession, and foreclosure rates continue to weigh down prices. If people can't pay their mortgages because they are losing their jobs, the supply of homes for sale will keep growing, putting a "downward pressure on prices," says Susan Wachter, professor of real estate and finance at the University of Pennsylvania's Wharton School of Business.

Even though no one knows when — or where — the market will hit bottom, it can't be too far away, says Jack Guttentag, professor of finance emeritus at Wharton. He runs the Mortgage Professor's Web Site.

If you can get a house under market value at historically low mortgage rates, it may be the time to buy, argues Kittle of the Mortgage Bankers Association.

The trick is figuring out what market value is in places such as Los Angeles and Washington, D.C., where housing prices have been falling by 3 percent a month, says Baker. He expects prices to plummet an additional 10 percent to 15 percent over the next year.

Is it harder to qualify for a mortgage now?

Standards have tightened. In most cases, you have to prove that you can afford the monthly payment. That means you have to have a job, a decent credit score and the assets you say you have.

But you don't have to put down 20 percent of the purchase price if you don't have it. Some traditional banks will let you put down as little as 5 percent, says Guttentag; you just have to prove you have enough income to make your monthly payments. And if you're applying for a Federal Housing Authority loan, you can buy a house with a down payment of 3.5 percent as of Jan. 1.

The real question is whether it's worth it — especially if you think house prices have much further to drop.

What if I am refinancing? What closing costs should I expect?

A general rule is that closing costs for a refinanced mortgage will fall between $2,000 and $2,500.

Another refinancing option is a "no closing cost loan" for borrowers who might not stay in their homes long enough to recoup closing costs. Instead of paying the $2,000 to $2,500 upfront, a borrower can refinance at a slightly higher rate — which might only cost them an extra $20 or so a month. That allows refinancers to lock in a good rate and refinance again if the rates fall further. But make sure there aren't pre-payment penalties for taking this route.

If you closed your loan within the past one to five years, you should get the reissue rate on your lender's title insurance, which can be up to a 70 percent discount, according to Kittle. That would be a $350 discount on a $500 lender title policy. But borrowers need to ask their title company or closing attorney specifically for this discount, because it's not illegal to charge the full price — even if it is unethical, he says.

Are mortgage rates likely to stay low for a while?

Yes, because there are many factors spoiling the economy and the Fed is using all the tools at its disposal to get money flowing.

"In some sense, for homebuyers it's the best of times and the worst of times," Guttentag says. "It's the best of times because prices have come down. ... The other side of it is this option is available only to people who can qualify in the current market. Everything is more difficult right now."

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