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Underwater Homes Trap Borrowers into Higher Rates

Written By Brian Hicks

Posted March 4, 2010





According to the Mortgage Banker’s Association (MBA), U.S. residential mortgage originations will plunge 40 percent this year to the lowest level in a decade.

Per the downgraded forecast, lenders will underwrite only $1.28 trillion in home loans in 2010, down considerably from the $2.11 trillion originated in 2009. That would be the lowest volume figure since loan officers cranked out $1.14 trillion in 2000.

Even still, new purchase originations are expected to rise slightly to $776 billion from $742 billion in 2009.  That leaves refinance originations as the market that will likely take the biggest beating.

In fact, according MBA projections, the dollar volume of loans being refinanced this year will fall to just $502 billion from $1.372 trillion in 2009.

That equates to a 63% drop in refinance originations alone—-a massive downturn.

The reason for this is simple: Low rates or not, millions of homeowners can’t refinance….

From The Wall Street Journal by Nick Timiraos entitled: Borrowers Miss Out on Billions in Savings

“The Federal Reserve has pushed mortgage rates to near half-century lows, but millions of U.S. homeowners haven’t benefited from that because they can’t-or won’t-refinance.

Falling home prices have left many owners with little or no equity, making it harder to qualify for refinancing. Moreover, stricter lending standards and higher fees by banks and mortgage giants Fannie Mae and Freddie Mac and declining incomes have made it tougher and less attractive for borrowers to seek new loans.

Around 37% of all borrowers with 30-year conforming fixed-rate mortgages-who collectively hold about $1.2 trillion of home loans-have mortgage rates of 6% or higher, according to investment bank Credit Suisse. Many could reduce their rates by a full percentage point if they refinanced at current rates, about 5%. More than half could lower their rates nearly three-quarters of a percentage point, according to Credit Suisse.

But new refinance applications in January stood near their lowest levels in the past year. Weekly data compiled by the Mortgage Bankers Association also show that refinance activity has been muted, considering that rates are so low.

“Traditionally, these borrowers would be aggressively refinancing,” said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse.

One indicator of the economic impact of refinancing: Loans that refinanced in 2009 will result in $3.4 billion in savings for consumers this year, according to a report by First American CoreLogic, a research firm based in Santa Ana, Calif. That will return an additional $17.2 billion in savings to borrowers over the next five years. That’s money consumers can potentially use to help spur economic recovery.

About a quarter of all mortgage holders are “underwater”-they owe more on the house than it’s worth-which normally makes it impossible to get refinancing: Banks want collateral to back the value of home loans they make.

Some people are so far underwater, refinancing ends up being out of the question. John Albright, a retired Navy officer in Manassas, Va., hasn’t been able to refinance because the value of his home has plunged. He figures its market value is now around $275,000, but he and his wife still owe more than $500,000 on their mortgage.

Their refinance application was turned down last year because they lacked equity in the home. He says his lender told him he could refinance only if he could come up with about $200,000 to pay down his mortgage. So they are stuck with an interest rate of about 6.5% at a time when his wife’s income has declined. “We’re going from paycheck to paycheck, but what can you do?” Mr. Albright says.”


Let’s face it, bubble gum and duct tape is the only thing holding this market together…..

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FHA Defaults: Many More on the Horizon

Mortgage Delinquencies a Set New Record

The Brewing Trouble at the FHA

Pinto: The FHA Needs a $54 Billion Bailout

Underwater Mortgages Drive the Next Foreclosure Wave

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