New refinance boomlet may lift economy, a bit

Low mortgage rates act as a gentle spur, but they're not enough to revive the housing market.

Melanie Stetson Freeman/Staff
Beth Byrne, a real estate agent in Natick, Mass., signs papers to refinance her mortgage at a 4.86 percent rate, down from her previous loan of 6.25 percent.

Record low mortgage rates aren’t proving to be an easy fix for the troubled US housing market, but they are providing a measure of much-needed stimulus to the economy.

In recent weeks, interest rates on home loans have plunged – thanks in part to government actions. Many borrowers have rushed to refinance their debt, a move that frees up cash in their bank accounts to spend on other things.

Like falling prices on gasoline and oil, the drop in interest rates acts somewhat like a tax cut for many consumers.

So are these low rates, coming before the Obama administration and Congress pass a formal stimulus package, enough to revive home sales and consumer spending?

Despite encouraging headlines about mortgage rates below 5 percent, that by itself may not bring a surge of buyers back to the housing market, and many current homeowners who want to refinance can’t get approved in today’s credit environment.

“It is a stimulus to the economy,” and it’s helping many households tame their debt burden, says David Wyss, chief economist at Standard & Poor’s in New York. “But it’s only people who can [qualify to] refinance … whose monthly payment goes down.”

During boom, refinancing was a boost
In the bygone days of the housing boom, mortgage refinancing was a powerful spur to the economy. With home prices rising, mortgage applications reached a peak in May 2003, driven not just by home-purchase deals but also by current homeowners seizing the opportunity to cut the cost of their debt.

They got cash in their pockets from lower rates, which fell below 6 percent for the 30-year fixed-rate loan, down from levels of 7 to 8 percent in the 1990s.

Many homeowners also got a windfall by tapping into the rising value of their home with so-called “cash-out” refinancing.

Today, with home prices in much of the nation down substantially from their 2006 peak, conditions are very different.

Fewer people eligible

Falling interest rates probably won’t pack the punch they did earlier this decade, unless accompanied by other programs that address borrowers’ ability to qualify for new loans, economists say.

It’s not just that credit standards have tightened in the current recession.

The decline in home prices has pushed about one-fifth of America’s 50 million mortgages “under water,” with loans bigger than the home’s market value, according to data from First American CoreLogic. Another one-fifth are near this negative equity position.

Debt woes delay refinancing

To refinance, these borrowers must either pay down their loans substantially or their lenders must agree to write down the principal, in the hopes that the new loan will be less likely to go into default.

Neither of those things has been happening very often. The White House and Congress are considering ways to prevent new foreclosures, including some programs in which troubled loans would be refinanced as lenders agree to write down principal balances.

For now, it’s people with good credit and positive home equity who are refinancing.

Still, every bit of stimulus helps.

Mortgage applications highest in six years

The volume of mortgage applications has leapt upward since November to its highest level in six years, according to the Mortgage Bankers Association.

On Thursday, the giant lender Freddie Mac reported that 30-year fixed mortgage rates averaged 5.12 percent this week, edging up from the record low of 4.96 percent the week before.

At best, the refinancing boomlet will be a partial fix for consumers. But policymakers hope lower rates will also fuel more home purchases – thus addressing the economy’s biggest weak spot.

That’s one motive behind government actions – including Federal Reserve interest-rate cuts and moves by the Fed and the Treasury to become buyers of mortgage-related debts – that have helped bring mortgage rates down.

So far, falling rates haven’t dented the big inventory of homes for sale. Potential home buyers may be reluctant to jump into the market at a time when prices are falling. But that may change if buyers begin to feel that the market bottom may be near, or that the low rates won’t last.

“If they believe this [opportunity] is temporary, this may entice them to come in” and buy, says Rajeev Dhawan, an economist at Georgia State University in Atlanta.

If enough buyers start to come in, the psychology surrounding the housing market could shift.

“A drop in mortgage rates is part of the solution” to the economy’s troubles, says Mark Vitner, an economist at Wachovia Corp. in Charlotte, N.C. But “there’s no one silver bullet.”

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