Amy Haenner, a broker at Legacy Lending Group in Fort Wayne, Indiana, is processing eight mortgages this week. None of them are for home purchases.
A year ago, her business was evenly split between home- purchase loans and refinancings that reduce interest rates on existing mortgages. That’s changed as a slowing U.S. economy curtails buying demand and encourages current owners to save cash by locking in near-record-low borrowing costs, she said.
“People are deciding to stay in place until the economy turns around,” Haenner said. “That same concern for the economy is causing buyers to take a wait-and-see attitude.”
About $783 billion of mortgages will be refinanced in 2011, according to a forecast released at this week’s Mortgage Bankers Association conference in Chicago. The projection is more than double the group’s estimate of $352 billion at the beginning of the year. Refinanced mortgages now account for 85 percent of home-loan originations, up from 70 percent six months ago.
The refinancing boom is combining with a U.S. jobless rate above 9 percent and a surplus of distressed properties to limit buyer demand for houses. People who refinance usually remain in a home for at least the time it takes to recoup fees and start seeing the benefit of a lower interest rate, and many stay longer as savings kick in. The National Association of Realtors estimates that homeowners now stay at the same address for at least a decade, compared with a 2006 average of six years.
“To fully recover the refinancing upfront fees, you generally would need to stay for three years or possibly longer,” Lawrence Yun, chief economist of the Chicago-based Realtors group, said in a telephone interview. “Some people after a refinance may psychologically not want to move, after paying for the refinancing costs.”
Fees and other costs of originating mortgages are near an all-time high of 0.95 percent of loan balances in August, second to March’s 1 percent, according to data from the Federal Housing Finance Agency. The payback period is calculated by dividing the amount of fees by the monthly savings.
Monthly savings on a refi may amount to almost $300, based on a 1.5 percentage point change of interest rate on a $300,000 home loan. Over three years, that amounts to about $10,000.
“It’s good for the economy to redeploy those dollars into consumer buying,” Ron Peltier, chairman and chief executive officer of Minneapolis-based real estate company HomeServices of America Inc., said in an interview yesterday at Bloomberg’s headquarters in New York. “We’ve seen the consumer’s earning stream diminish in the last few years. By refinancing, it’s like they’re giving themselves a raise.”
Record Mortgage Rates
Borrowing costs have fallen to the lowest level on record, with the average rate for a 30-year fixed mortgage dropping to 3.94 percent last week, according to Freddie Mac data going back to 1971. That hasn’t translated to increased demand for homebuying as concern grew last month that Europe’s debt crisis will trigger a global recession and the Federal Reserve said there are “significant downside risks” to the U.S. economy.
Purchase mortgages likely will tumble 15 percent this year, the Mortgage Bankers Association said in this week’s forecast. A month ago, the group predicted an 11 percent decline.
“People are all about deleveraging now,” said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. “People don’t want to take on more debt by buying a new home. They want the extra cash they’ll get from refinancing.”
The median income for American households fell to $49,445 at the end of 2010, below the level reached in the 1990s, according to government figures. Without a reversal of that trend, most families will never be able to buy homes, Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities, said during a panel discussion at the Mortgage Bankers convention.
“The middle-class squeeze is greater than ever,” David Axelrod, former senior adviser to President Barack Obama, said at the conference. “Americans are working faster and faster to meet their bills and pay their mortgages.”
That drop in home purchases will heighten real estate’s drag on the economy, Mark Zandi, chief economist at West Chester, Pennsylvania-based Moody’s Analytics Inc., said at the convention. In the first half of the year, U.S. growth slowed to the lowest rate since the recession.
Back to ‘Soup’
“This economy broadly is not going to engage until housing is at least moving in the right direction,” Zandi said. “Right now, we are very close to going back into the soup.”
About 40 million mortgaged homes have at least 5 percent equity, meaning they may be eligible to be refinanced. In the second quarter, 11 percent of new mortgages bought by Fannie Mae, the largest U.S. home-loan finance company, had equity of 10 percent or less, according to regulatory filings.
Another 11 million borrowers can’t move and can’t refinance because their mortgages are bigger than the value of the homes that secure them, according to CoreLogic Inc., a Santa Ana, California-based real estate research firm. About 2.4 million have equity of 5 percent or less. A government effort known as Home Affordable Refinance Program allows homeowners who are up to 25 percent underwater to get new loans.
Homeowners who commit to stay in place are investing in inexpensive renovation projects, as people make do with what they have. Of the 125 million households that remodeled last year, 40 percent spent less than $1,000 and 60 percent spent less than $3,000, Census Department data show. Permits for remodeling jumped 24 percent to a record in July, according to BuildFax, an Austin, Texas-based real estate data company.
Turning to Remodels
Owners “are more and more turning to renovating and remodeling their current properties,” said Joe Emison, head of research and development at the real estate data company.
Every 1 percent decline in mortgage rates makes 3 million more people eligible to refinance, as income and debt loads are measured against the rate, though not all of them will apply for home loans, said Yun.
“One good side of a slowing economy is interest rates have continued to fall, creating high demand for refinancing activity,” said David Stevens, the former head of the Federal Housing Administration who six months ago became president and CEO of the Mortgage Bankers Association, said at the conference. “It may be the only good side.”