Mortgage Rates At 37-Year Lows!!

Finally, some good news.  Mortgage rates are now at their lowest since 1971 as the Federal Reserve continued to pour money into the morgage market in an effort to jump-start  housing sales. Freddie Mac announced that rates for 30-year, fixed conventional mortgages have dropped to 5.19%. This is the lowest rate since Freddie began its weekly mortgage survey in April 1971. Subsequently, nationwide rates fell to 5.06, the lowest since the 1960s.

All this comes as a result of the Federal Reserve buying up $600 billion of mortgage-related securities and other debt issued by Fannie Mae, Freddie Mac and other Federal Home Loan banks.

This has resulted in a surge of homeowners seeking to refinance adjustable-rate mortgages.  Refinancing, however, has become a much more difficult game than in the past few years when home owners seemed to view their homes as alternative ATM machines, refinancing sometimes two or even three times in the same year. Refinancing is now far more difficult.

First, homeowners must have equity in their homes.  Here in SoCal where prices have dropped over 35% in the past year, this means either the very conservative who did not participate in the refi craze or those who have owned their homes in good areas for a long time.  Second, the old days of no qualifying and no verification are over. Now homeowners must  qualify, providing evidence of   income via tax returns, W-2s  and bank statements. Also, even qualifying homeowners must be aware that refinancing costs money for points, title and  escrow fees as well as appraisal fees.  Yes, the fees are integrated into the new loan, but in these days of plummeting equity is that a good idea?

For those near or in foreclosure these new rates will mean little or nothing as the foreclosure will continue. However,Fannie and Freddie do plan to help distressed more homeowners via loan modifications. In fact, the plan is to up the loan mods from the 60,000 last year to 75,000 this year.  Loan modifications typically are applicable only to those who’ve missed at least three loan payments, have sufficient income to make a modified payment and still live in their homes.  Recent data have shown that, distressingly,  even those who get loan mods wind up in foreclosure a few months later.

Falling interest rates are a godsend to the economy. Just as consumers have benefited from falling gas prices, homeowners who buy now or who can refinance will find themselves with quite a windfall of extra money in their pockets. In the aggregate, this should account for billions of dollars of extra spending power and may accomplish its goal of stimulating the now-moribund housing sector.

It looks like good news for the new year. We could certainly use some.

And Now For the Good News

Finally, some relief for California home sellers and home buyers. As part of the federal stimulus package,  conforming loan limits have been raised substantially, up to $729,000 and, to FHA  loan limits are up to the same amount until the end of the year.

Well, hooray for mortgage wonks! We were hoping for something that made sense,  you might say…Here’s what it all means…

 Until now, conforming loan limits,  meaning those conforming to the guidelines issued by Freddie Mac and Fannie Mae and thus saleable on the secondary market, capped at $417,000. Above that limit and buyers had to purchase a so-called jumbo loan with rates at least 1% higher and sometimes far more. That hadn’t bothered us in SoCal much.  Even with our ever-escalating prices, lenders simply packaged a first loan up to $417,000 and offered a smaller second loan to cover the difference.

Then came August 07 and the subprime crisis hits the fan. Foreclosures start to multiply, so lenders revise their guidelines to plug up the gaping holes speculators and the penniless had been running through. The investors who provide the money for the second loans designate SoCal counties as “distressed” and decline to provide any more funds. 

   Jumbo loans cost 1-3% more than conforming, so who is going to take the hit?   With lenders heading for the hills, it’s pretty clear that sellers will have to revise their prices, but even then buyers are declining to participate. The market slows to a snail’s pace, making a bad situation worse.

 Then, our do-nothing Congress, mired in gridlock, wakes up: 2008 is an election year! Miraculously, passing a bi-partisan stimulus package in record time, Congress  makes sure we all receive $300, $600, $1200 or whatever from our tax returns. But, this bill  also helps home owners sell their homes by raising the conforming  rate up to $729,000 in highest priced areas, such as our own.

 What about the buyers? Buyers will have an easier time to qualify with the lower rates, but first-time buyers are getting a break, too. FHA loan limits are $729,000 until the end of the year; that rate expires  right after the election. FHA loans typically have down payments of 3-5% or 103% of the purchase price for repairs, all guaranteed by the Federal Housing Authority [FHA]. FHA made home ownership possible for millions of Americans after World War II. FHA may save us once again.

So, you see this is really good news, not just for wonks but for home sellers and first time buyers.