Rate Drop Spurs Home Refinancing

By NICK TIMIRAOS SEPTEMBER 24, 2011 for WSJ.com

The 30-year fixed-rate mortgage dipped below 4%, possibly triggering a refinancing boom for many of the same borrowers who already have taken advantage of rock-bottom interest rates.

According to a survey by Credit Suisse on Thursday, lenders were offering an average rate of 3.91% on 30-year fixed-rate mortgages to borrowers who paid "points," or fees, worth 1% of the loan balance.

Wells Fargo & Co. advertised on its website Friday afternoon a 3.875% rate on a 30-year fixed-rate mortgage, with fees of 1% on the loan.

Lou Barnes, a mortgage banker in Boulder, Colo., refinanced four borrowers on Thursday into 30-year fixed-rate mortgages at 3.875%. "At this point, the only people being helped are those who need it the least," he said.

For the home-sales market, low rates will help make homes more affordable, but may not boost home buying if consumers are worried about the economy.

"Today, the buyers' concern is the falling value of homes," said Mr. Barnes. "I've had potential buyers say: 'I don't care if rates are zero if prices are going to fall again.' "

Mortgages rates fell this past week after the Federal Reserve announced Wednesday that it would begin plowing payments from its portfolio of $885 billion in government-backed mortgage bonds back into mortgages. That caused a rally in the mortgage market because the Fed's move eliminates the risk that the central bank would be forced to sell its mortgage holdings as refinancing increases.

Mortgages rarely have been this cheap. A 1961 study by the National Bureau of Economic Research shows that loans made to World War II veterans in the late 1940s were available with 4% rates.

More than 60% of borrowers with a 30-year fixed-rate mortgage could reduce their mortgage rate by one percentage point, up from 42% at the beginning of August, according to Credit Suisse.

But some borrowers haven't been able to refinance rates because they can't qualify under loan standards that are much tighter than at the time of their first loan. Other borrowers don't have enough equity in their home to refinance.

Before the housing crisis, refinancing tended to jump when borrowers were able to lower their rate by 0.5 percentage point. Since 2009, mortgage applications have taken longer to process, while riskier borrowers have faced higher refinancing costs. As a result, borrowers typically now refinance when rates are 1.5 percentage points below their current rate, according to Bank of America mortgage analysts.

Donald Fraser, a 56-year old pathology assistant who shaved a full percentage point off the 4.875% mortgage he got last year, said he plans to stash most of the $2,700 a year in savings into retirement. "I don't think we'll ever see these rates in my lifetime or yours," he said.

It isn't clear how much these lower rates will help the economy, in part because a weakening economy is fueling the decline.

"We felt lucky. At the same time, we're lucky at the expense of a suffering market," said Richard Klompus, who refinanced his Glastonbury, Conn., home with a 4%, 30-year fixed-rate mortgage.

Mr. Klompus, 49, had a hybrid adjustable-rate mortgage that carries a 4.5% rate for the first five years before moving to a variable rate. He paid tens of thousands of dollars to pay down his loan balance to $417,000, the maximum size for loans eligible for purchase by mortgage companies Fannie Mae and Freddie Mac.

To encourage refinancing, Obama administration officials and U.S. regulators are in talks with lenders about ways to revamp an existing White House refinancing initiative designed to help borrowers with little or no equity. The program is open to borrowers whose loans are backed by Fannie and Freddie, which guarantee about half of all outstanding home loans.

The Federal Housing Finance Agency, which oversees Fannie and Freddie, is weighing a series of changes to the program, which has been snarled by a series of technical hurdles. Just 838,000 borrowers have refinanced, short of the hoped-for four million to five million. Just 63,000 of those borrowers have loans worth more than 105% of their home value.

"It hasn't worked, to be honest," said James Parrott, a top White House housing adviser, in a speech to industry executives this week. He said the housing market is at a "critical juncture" and policy decisions over the next six months could determine whether the economic headwinds are "going to be a blip or a broader struggle."

A separate question is whether banks will be able to handle the volume of mortgage applications.

Banks recently have laid off mortgage employees in anticipation of lower loan volumes, while shifting others to the backlog of delinquent loans. The reduced ability to handle loan volumes means that banks have charged higher rates relative to their borrowing costs, muting the decline in rates.

Write to Nick Timiraos at nick.timiraos@wsj.com