It’s almost hard to be surprised by the mortgage market anymore. On Wednesday, September 21st, the Federal Reserve announced their latest attempt to stimulate the economy by rolling out “Operation Twist,” in which they will adjust their holdings of short-term assets by selling them and purchasing long-term assets. This $400 billion effort is intended to lower long-term borrowing rates for things such as mortgages and business loans, and so far it is having its desired effect on the mortgage market. On the day after their announcement, we saw rates fall to their lowest levels on record – certainly the lowest that I’ve seen them in my 16 year originating mortgage loans.
While mortgage rates have declined, I don’t anticipate an overwhelming tidal wave of refinance activity. Of course, there will be a marginal increase in the amount of people that can now justify the expense of a refinance because the rate has dropped enough to create sufficient savings, but there are many obstacles to refinancing that can’t be overcome by a lower rate -- and these are the same obstacles that have been in place for the past couple of years. The first one is fairly obvious: the decline in home values has eroded the equity position of homeowners to the point that they can no longer qualify for a refinance loan. The government has tried to address this issue by rolling out the Home Affordable Refinance Program, or HARP, but this is limited in scope and has been only mildly successful. The other significant obstacle to refinancing is the issue of mortgage insurance. Existing home loans that have mortgage insurance are in an extremely tough position. By their very nature, these home loans began without much equity in the property, and with the recent decline in property values, almost all of these homes are now underwater. The HARP program cannot help them, so they are in a bit of purgatory until property values increase.
Another challenge faced by homeowners that are interested in refinancing is the trend of declining income. This can be seen in almost all self-employed individuals and by those that receive commission-based income. As the economy has suffered, so too have those individuals whose income is based upon a strong, robust economy. It is very difficult to be approved for a home loan if your income history indicates a declining trend.
Will “Operation Twist” bring about the type of economic recovery that the Federal Reserve is hoping to see? It’s hard to say at this point. It’s obviously a complicated problem. We’ve had some of the brightest minds working on this for a few years now, and things appear to be worsening at this point. This could be a situation where only time will heal what is ailing us, but we Americans are not a patient lot. Let’s hope we see some signs of recovery soon.
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