Last week in the US, responding to lower borrowing costs, mortgage applications rose for the first time in a month. The average rate on a 30-year fixed loan fell to 4.95% from 5.04% the week before. More of the demand was driven by refinancing, a 17.2% increase compared to the rise in new home purchases which was up 9%. Refinancing made up 69% of the applications. The results were no surprise after new home sales fell in January to the lowest number on record.
According to Michael Fratantoni, vice president of research and economics at the Mortgage Bankers Association, “Mortgage applications rebounded last week, particularly refis, as rates dropped back below 5 percent. Purchase activity remains subdued, with application volumes remaining within the narrow range seen in the last few months.”
The purchase market weakness is due to high unemployment and a lack of consumer confidence. Still it is a prime time to buy a home:
- Home prices have bottomed out in many markets, already on the rise in California. In most areas it’s a buyers market where purchasers can negotiate. This is especially true at the upper end where homes worth over a million dollars have seen severe differences between asking and selling prices.
- Interest rates remain low. On a 30 year fixed rate mortgage, at the current rate monthly borrowing costs for each $100,000 of a loan would be less than $534.
- The homebuyer tax credit is still in effect, up to $8000 on a first home, $6500 if you’re moving to a new principal residence after spending 5 out of the last 8 years as the homeowner at one’s current address. Remember, to qualify a binding contract has to be signed by April 30, 2010.
It is also an excellent time to refinance because mortgage interest rates are likely to rise by the end of this month when the Federal Reserve Bank stops buying mortgage backed securities. Refinancing is always your best way of lowering your mortgage payment, because it increases your credit score. Remember, to make a refi worthwhile you need a current mortgage interest rate of 6% or over.
Servicer Suggestions
Not everybody can get refinancing. For many distressed homeowners the best way to reduce monthly mortgage payments is through a loan modification. In testimony today, before the Domestic Policy Subcommittee of the House Oversight and Government Reform Committee, Ocwen Financial Corporation President Ronald M. Faris, expressed his support for the government’s Home Affordable Modification Program, HAMP. He did acknowledge that it’s falling short, “Almost a year into HAMP, too many homeowners facing foreclosure are having difficulty getting their loans modified.“
Mr. Farris suggested the following changes:
- Lower the housing-to-income ratio for borrowers to below 31%. “One out of every four HAMP applicants is rejected for failing to meet this standard,” according to Mr. Farris. He suggested lowering the HTI to 28% or providing adjustments for dependents.
- Mr. Farris broke ranks with other mortgage servicers and urged that more borrowers be granted principal reduction on their loans. According to his company’s experience, negative equity increases the risk of mortgage default by 150 – 200 %
- Increase government funding to housing counseling agencies.
- Mandate that servicers falling short outsource their distressed loans to servicers that deliver as expected on HAMP. “Whether for lack of effort or just an inability to handle the volume, too many banks are not producing the results needed to achieve program goals. Treasury should be empowered to redirect servicing to those with a proven track record and available capacity to execute trial modifications and convert them to permanent solutions,” Mr. Farris said.
