NEW YORK (Reuters) - In one of the first signs of life in a battered mortgage market, homeowners are lining up to capitalize on this week’s plunge in interest rates, which made an additional $1 trillion in loans attractive for refinancing.
Fears of a U.S. recession and an emergency Federal Reserve interest rate cut pushed rates near record lows this week, dropping benchmark 10-year Treasury note yields to as low as 3.30 percent on Wednesday from 3.70 percent a week ago.
That increased the amount of mortgages eligible for refinancing by around 50 percent to more than $3 trillion, based on estimates using Bear Stearns & Co data.
Homeowners with a $250,000 loan paying 6 percent interest today could save at least $1,200 annually by refinancing to today’s fixed rates at 5-3/8 percent, according to rates cited on Wednesday by Web site Refinance.com. Wells Fargo & Co (WFC.N) offered a rate of 5-1/8 percent, with 1 percent of the loan paid upfront, according to an automated e-mail.
Most of the fixed-rate mortgages outstanding carry interest between 6 percent and 6.5 percent, so prospective savings have created feverish borrower activity.
“There is pandemonium right now at the mortgage banks,” said Bob Walters, chief economist at Quicken Loans, an online mortgage lender in Livonia, Michigan. “They are knee-deep in telephone calls” from customers seeking better rates, he said.
The average 30-year fixed mortgage rate at 5.49 percent as of Friday was its lowest since June 2005, the Mortgage Bankers Association said on Wednesday. The rate has plunged 0.69 percentage point since mid-November.
Fed Chairman Ben Bernanke’s emergency 0.75 percentage point cut in the U.S. central bank’s target interest rate on Tuesday is seen as a move to save an economy on the verge of a recession, and provide a much-needed exit for borrowers with mortgages facing the shock of rate adjustments.
Risky subprime borrowers may benefit, but probably less so since lenders burned by mortgage losses have tightened their purse strings in recent months and have instated tight lending rules.
Quicken Loans saw a 50 percent pickup in loan applications after the Fed rate cut, Walters said. At LendingTree.com, daily refinance inquiries soared 230 percent to their highest ever, a spokeswoman said.
Refinancings “are one of the few areas where the rate cut has an immediate effect on the economy,” said Nicholas Bratsafolis, chief executive officer of Refinance.com, an online lender that saw its applications double this week.
Applications for refinancings before the rate cut had already risen by 92 percent since early November, the Mortgage Bankers Association said on Wednesday. The increase was due to lower rates and the multiple applications made by borrowers expecting to be turned down by one or more lenders.
A loan is conforming if it’s eligible for purchase by government-sponsored enterprises Fannie Mae and Freddie Mac, which still garner investor support because they guarantee principal and interest payments on mortgage-backed securities they issue. Among requirements, loans must be $417,000 or less and carry mortgage insurance if the borrower has less than 20 percent equity in the home.
Creditworthy borrowers with adjustable-rate mortgages may be the biggest winners, with the fresh opportunity to escape the $165 billion in prime loans whose payments are slated to rise this year. Those borrowers have been among the most active on LendingTree.com, said C.D. Davies, chief executive officer of the online lender.
For all the hoopla, refinancings will fall short of the record wave of 2003 when 30-year rates hovered around current levels, or as low as 4.99 percent, analysts said.
The mortgage market, totaling more than $10 trillion, is still loaded with loans that will not qualify for refinancing or whose rates do not justify getting a new loan.
Jumbo rates remain stubbornly high at about 0.8 percentage point above conforming loan rates — compared with about 0.15 point during boom years — since jittery investors have cut off an important source of funding for lenders.
Fannie Mae FNM.N and Freddie Mac FRE.N themselves have raised costs passed on to borrowers as they reassess their risk-taking. Falling home prices across the nation have eroded home equity, reducing the temptation to apply for “cash-out” refinancings.
Many subprime borrowers with adjustable rate loans will not qualify for any loan unless they have improved their credit. One hope for those homeowners are loans backed by the Federal Housing Administration (FHA) that require just 3 percent equity, Bratsafolis said.
Perversely, the impetus for lower rates may even result in a worsening of the housing crisis, analysts said. A recession would cause businesses to tighten up on credit for those who need it most, including subprime borrowers with $370 billion in mortgages slated for rate resets this year, the analysts said.
“This time around it’s more skewed to people with decent credit and some down payment and equity in homes,” said Quicken’s Walters. “People with poor credit will probably not be able to take advantage.”
Editing by Jonathan Oatis