With close to record low mortgage rates, mortgage loans should be at record high numbers, but that is not the case. Lenders are balking at refinancing loans for both businesses and consumers with ever tightening lending standards. President Obama has called the major lenders to Capitol Hill on Monday, December 14, 2009, for yet another meeting on how to get credit moving.
The agenda for the meeting is supposed to be about increasing the flow of loans to homeowners and businesses alike. Representatives from the big 5 lenders, including JP Morgan Chase, Bank of America, Wells Fargo, Goldman Sachs and Citigroup, as well as many other smaller lenders, are expected to be in attendance.
It is estimated that currently 6 out of every 10 home owners have mortgages higher than the going rate of 4.8% (the rate at the close of business on Friday for 30 year fixed rate loans). It is unknown exactly how many of those home owners have tried to refinance their current mortgages, but the numbers are high. The HARP loan program has been unavailable for those whose loan values have dropped too far below the HARP guidelines, or those who currently have mortgages with mortgage insurance. In addition, with all the "risk based pricing adjustments," for many who would have otherwise qualified, the mortgage rate being offered is actually higher than the home owners' current rates.
The peak level of refinancing was in January 2009. Since then, home values have continued to decline, eliminating more potential refinances, and lender guidelines have continued to tighten. Last week, when we saw almost record lows, only half as many people applied for refinances as the number in January.
The total volume of refinance transactions for the year totals about $1 trillion, which sounds like an enormous number. But, in 2003, when rates last dropped very low, the total dollar amount of refinances totaled $2.8 trillion. The last time that mortgage rates for 30 year fixed rate loans averaged below 5% when the government was holding down rates to finance WWII.
The Feds have been doing their part to drive mortgage rates low with their purchase of $1.25 trillion in mortgage backed securities during 2009. This program will end after the first quarter of 2010, and some fear mortgage rates could rise as high as 6% by the end of 2010!. (This number has been reported to range from 5.5% - 6%).
Banks say they have to keep lending regulations tight because of reserve requirements mandated by federal regulators. Of course, reserve requirements would be less difficult for the banks to maintain if they were not foreclosing on so many homeowners, and therefore taking such huge write downs on those properties.
And so, here we are at this Catch 22. If banks would help more home owners, they would reduce their write downs, but banks are balking at helping homeowners, so this cycle continues.
As 2010 is just around the corner, the forecast is that "strategic foreclosures" will continue to rise. Even those with stellar credit, who have never missed a loan payment are tired of trying to fight the system. Many of those home owners would be willing to continue to pay on homes under water, if they could get their loan modified or refinanced at going rates, but acknowledge they will walk if forced to continue to pay higher rates.
President Obama is not giving up yet. The meeting tomorrow will be yet another attempt to find a way to get the banks lending again. After all, isn't that why they were bailed out with TARP funds in the first place?
You might also like to read:
There is a new foreclosure filing every 13 seconds in the US
Strategic foreclosures - The new wave
Moody's Economy predicts another 4.6 million foreclosures in 2010
Resources: NYT: Interest rates are low but banks balk at refinancing
Average rate information on above chart from Mortgagex.com
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