Holding Out for Cheaper Mortgages

Originally published in The Boston Globe

December 12, 2008
Jennifer B. McKim (Reporter, The Boston Globe)

Mortgage rates are approaching 5 percent, so of course, nobody's borrowing.
How's that?
Yes, even though rates on home loans are approaching historic lows, many prospective borrowers are apparently holding off, on the assumption that in just a few weeks they will be able to get even better deals.
Borrowers are tempted by a proposal floated by the US Treasury to move rates to 4.5 percent for 30-year, fixed-rate mortgages.
And other efforts are afoot that could further drop rates. The Federal Reserve Bank recently initiated a mortgage-buying program to lower rates. Upping the ante, the nation's top mortgage regulator, James Lockhart, told a business group earlier this week that the government's ongoing efforts could result in rates dropping "well below 4 percent."
These developments have left mortgage lenders in limbo.
"Rates could pop up tomorrow, and people are still waiting for the government to come through," said Brian Koss, managing director of Mortgage Network Inc. in Danvers. "The people who are looking to refinance are thoroughly confused."
Koss and others worry that borrowers who wait will miss out on the low offers available now, should the government efforts fail to materialize.
Treasury officials have not commented, but news accounts have said the agency's 4.5 percent target would apply only to loans used to purchase homes, not for refinancing. Treasury reportedly hopes it will stimulate the residential real estate market by making it cheaper to buy.
US Representative Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, predicted any new measure won't happen for some time, so borrowers in a hurry shouldn't wait. Frank said Congress would include a mortgage-rate initiative as part of a plan it will consider in January for the second half of the $700 billion financial bailout package adopted in October.
In order for Treasury to receive the second $350 billion, Frank said, it will have to support efforts to lower interest rates to spur home sales, money for foreclosure relief, and guarantees that financial institutions receiving aid will increase lending.
"People who are not in trouble, people who already own a home, or who are not in danger won't get any help," said Frank about the new initiatives. "The two important things are to reduce foreclosures and stimulate new home purchases."
Housing experts and economists are debating whether the government's move to reduce mortgage rates would help the housing crisis or needlessly put taxpayers at further financial risk. Others question the length and scope of these efforts.
Amy Tierce, regional manager for Fairway New England Mortgage in Needham, said the Treasury proposal should not exclude refinancing. Many of her clients are having trouble getting loans at the current low rates because of stricter lending guidelines and declines in housing values.
"What about people who are in their houses and paying their payments and aren't in trouble but could use some relief?" Tierce said. "You have a whole group of people left in the middle, who have been supporting this economy, who are being left out in the cold on being able to participate in this low-rate environment because it has become so restrictive."
Already, a small but growing number of struggling borrowers are being awarded new rates that others can only envy. The nonprofit Neighborhood Assistance Corporation of America in Jamaica Plain said it is refinancing delinquent borrowers into fixed-rate mortgages as low as 3 percent. The Federal Deposit Insurance Corp. is offering certain customers of IndyMac Bank, which the agency seized in July, rates as low as 3 percent for five years.
"People on both sides of this issue are complaining that the solutions are not fair. Fairness isn't on the menu anymore," said FDIC spokesman Evan Wagner. "This is about stopping the bleeding and stopping the vicious circle we are in where assets lose value and companies take losses."
Mortgage rates have yo-yoed since September and dropped precipitously in late November after the Fed said it would buy $600 billion in mortgages and mortgage-backed securities. Lower rates initially prompted a surge in applications for mortgages, but the pace declined last week after news of Treasury's plan surfaced, according to the Mortgage Bankers Association.
Local brokers said customers are telling them they're holding out for even better news.
"A good percentage of my clients are waiting because they hear the rates will drop to 4, 5 percent," said Brian McLaughlin, vice president of New England Home Funding in Fairhaven.
Edward Glaeser, a Harvard University professor of economics, said a 4.5 interest rate won't motivate enough buyers to purchase lingering housing stock and increase prices. Moreover, the program could be expensive if payment defaults continue to rise.
"You are initiating a huge program for what I would estimate would be very modest effects in terms of housing prices," said Glaeser. "It's a terrible mistake."
In Brookline, one developer is using super-low rates to attract buyers. The builder of Hammondswood in Chestnut Hill recently offered buyers rates as low as 1.75 percent for the first year of a 30-year mortgage, with the cost rising to 4.75 percent in the fourth year. The developers are paying the lender, Wells Fargo, points to get the low rates.
"We realized that when mortgage rates come down we have an opportunity of getting housing moving again," said David Zussman, chairman of Boston Development Group. "We were just trying to think out of the box."