President Obama, in his weekly address on Saturday, placed much of the blame for the recession on “the irresponsibility of large financial institutions on Wall Street that gambled on risky loans and complex financial products, seeking short-term profits and big bonuses with little regard for long-term consequences.”Why have so few people taken advantage of the low rates to refinance?
The president is scheduled to meet with banking executives at the White House on Monday in another administration effort to increase the flow of loans to consumers and small businesses. Among those expected to attend are representatives from Citigroup, JPMorgan Chase, Bank of America, Wells Fargo and Goldman Sachs.
An estimated six of 10 homeowners with mortgages have rates that exceed the 4.8 percent rate currently available on 30-year fixed mortgages, the least risky form of home loans.
Nevertheless, only half as many refinancing applications were reported last week than were reported at the beginning of January, the peak level for the year. The total dollar volume of refinancing activity in 2009 will be about $1 trillion. In 2003, another year when rates fell, it was $2.8 trillion.
(Mortgage applications to purchase houses showed modest improvement for much of the year, but recently fell sharply to their lowest level in 12 years.)
“The government has succeeded in driving mortgage rates down to their lowest level in our lifetime,” said Guy Cecala, the publisher of Inside Mortgage Finance magazine. “That hasn’t been a big home run, because a lot of people can’t take advantage of it.”
It is highly unusual for mortgage money to be available below 5 percent. Average rates fell as low as 4.7 percent in the 1940s, as the government held down interest rates to finance World War II, and stayed just below 5 percent until the early 1950s. Rates went above 5 percent in 1952 and stayed there — until this year.
For starters, real estate in much of the country is underwater; the mortgage exceeds the value of the property at current appraisals. Under those circumstances, the banks shouldn't be refinancing the properties because the values don't support them. I've already refinanced my home once in the past year, and I got a rate one point lower than when I first purchased. I would refinance again if the rate dropped another point below my current mortgage, but until that happens, it isn't worth the financial hit to do so, even if I'm rolling the closing costs back into the mortgage. My home price has thankfully been relatively stable, in part to my neighborhood being relatively stable for home prices and that I've done significant improvements to the home so that the appraised price is still at or above my purchase price. Many people across the country can't say that, which is why they're not able to take advantage of the low interest rates.
The President's policy to provide homeowner assistance also falls short because it continues to distort the marketplace, and that low interest rates, particularly for adjustable rate mortgages, will rise significantly once their teaser rates end, leaving people who have marginal credit in the same position that created the market meltdown in the first place. It's setting things up for a repeat of the real estate meltdown, but this time President Obama is looking to blame the banks for the mess instead of calling out homeowners and banks for extending credit to those who should not have received loans on homes they could not afford.