Harold Fuller said he’s planning a cruise with his wife to Bermuda, their first vacation in two years, after cutting his mortgage payments by $400 a month after refinancing their $212,000 home in Apopka, Florida.
“The key is to have cash flow to do some additional things,” said Fuller, 65, who’s also planning more weekend trips around the state. Fuller took advantage of the government’s Home Affordable Refinance Program, which allows the refinancing of homes worth less than their mortgage.
The combination of easier lending standards and record-low mortgage rates is beginning to shore up real estate markets in states where home values plunged. It has breathed new life into some regional economies as Americans spend the savings at malls and auto dealers, spurring a pickup in sales-tax receipts that is also helping replenish state coffers.
“HARP and refinancing more broadly is providing a meaningful boost to homeowners’ cash flow, particularly in the stressed housing states like Florida,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who testified last month on the program before the Senate Banking Committee. “This is going to be a big plus for stressed homeowners in very stressed markets with negative equity.”
Reports today showed the global economy is slowing as Europe deals with is debt crisis. French factory output dropped in April and Italy’s economy shrank in the first quarter as consumers, businesses and governments across the continent retrenched.
In China, retail sales trailed forecasts while exports exceeded estimates, indicating last week’s interest-rate cut was aimed at countering a domestic slowdown.
Stocks in the U.S. retreated as optimism over Spain’s bailout plan gave way to skepticism it will succeed in halting the debt crisis. The Standard & Poor’s 500 Index dropped 1.3 percent to 1,308.93 at the 4 p.m. close in New York.
With about 5 million U.S. homes likely to be refinanced this year, consumers could reduce their interest payments by about $12 billion, Zandi said. About 1.2 million homeowners refinanced mortgages in the first quarter, according to the Federal Housing Finance Agency. Interest payments saved by borrowers typically exceed $2,500 a year, Zandi said.
Refinancing negative-equity loans “puts more discretionary money in the pocket of consumers,” Federal Reserve Bank of Atlanta President Dennis Lockhart told reporters after a speech in Fort Lauderdale, Florida, June 6. “That helps the broader economy.” HARP “is actually working rather well,” he said.
The Fed’s June 6 Beige Book report on the economy cited higher demand for refinancing through late May in the Atlanta Fed district, which includes Florida and Georgia.
Refinancing under the program nearly doubled in the first quarter to 180,000 from the prior three months, the FHFA said June 1. The independent agency overseeing Fannie Mae and Freddie Mac in January unveiled changes that included the removal of loan-to-value requirements for borrowers, the waiving of some fees, and promising lenders a break from the warranties they sign when they originate certain loans.
The gain compares with what Zandi calls a “disappointingly slow” start since HARP began in 2009. About 1.2 million loans in the U.S. have been refinanced under the program, well short the Obama administration’s goal of 4 million to 5 million.
Homeowners are also benefiting from falling borrowing costs. The average 30-year U.S. mortgage rate dropped to 3.67 percent in the week ended June 7, down from 5.05 percent in February, 2011, and the lowest since McLean, Virginia-based Freddie Mac began records in 1971.
The nation’s banks are being helped by the refinancing program as well. U.S. banks’ second-quarter revenue will be bolstered by “positive trends in mortgage originations on the wings of HARP,” with Bank of America Corp. and JPMorgan Chase & Co. among the larger beneficiaries, John E. McDonald, a Sanford C. Bernstein & Co. analyst, said in a June 7 report.
State budgets are also finding relief because of the jump in refinancing. In Florida, revenue has exceeded expectations of state forecasters the past four months, with April led by gains in auto and durable-goods sales taxes, the state’s Office of Economic & Demographic Research in Tallahassee said last month.
Consumer spending in the U.S. rose at a 2.7 percent annual rate in the first quarter, the most in more than a year, government figures show. Retail spending has also been supported by household wealth, which climbed in the first quarter by the most in seven years, and a decline in gasoline prices.
In Florida, about 400,000 loans may be swapped to lower-rate loans now that home values are less of an obstacle, said Rob Nunziata, president of FBC Mortgage LLC in Orlando. “We are inundated with HARP loans, like a dam breaking,” he said.
SunTrust Banks Inc., which is based in Atlanta and operates mostly in the U.S. Southeast, said HARP loans are “approaching 50 percent” of mortgage refinancing, with the bigger benefits to customers in Florida and Georgia. “I think the running room is pretty long,” Chief Executive Officer William Rogers said in an interview May 15.
“It is like drinking from a fire hose right now,” said Chris Brown, mortgage planning specialist at Certified Mortgage Planners in Orlando, Florida. Brown said he’s receiving 25 applications a week, up from less than five a year ago.
The mortgage industry shrank during the financial crisis, so “the biggest impediment to even more refis is capacity among the large mortgage lenders,” Zandi said.
Cincinnati-based Fifth Third Bancorp just started doing Florida loans under the new guidelines in April, and had built a backlog of 400 customers with $80 million in loans, said Andy Insua, who heads mortgage operations in the state. “This has opened up refinancing for the first time in Florida,” he said.
About 44 percent of Florida mortgages had negative equity in the fourth quarter, according to CoreLogic. Other states with a high percentage of so-called under water properties were Nevada, Arizona, Michigan and Georgia.
For Fuller, refinancing cut his monthly rate to 4.25 percent from 6.5 percent.
“I will definitely be able to buy a few more things,” the retired human resources manager said.
Retailers are becoming more upbeat. The refinancing gain has contributed to about a 6 percent increase in revenue through May at Tamarac, Florida-based City Furniture Inc., which operates 23 stores, said Keith Koenig, its president.
“We are seeing increased demand and the two are definitely related,” he said.
Sales at the 12 auto dealerships owned by Tampa-based Morgan Auto Group are “ahead of budget this year and we budgeted aggressively,” said Larry Morgan, the group’s chief executive. “If they can save $500 on their home loan, that is $500 they can spend on something else,” he said.
Not all the refinancing savings will go into spending.
Matt Ullery, 43, a software engineer in Palm Harbor, Florida, near St. Petersburg, says it was a “no brainer” to cut his mortgage interest to 4 percent from 5.88 percent, where it had been since his 2005 purchase. His home value has dropped to $260,000 from $355,000 in an area he describes as “ground zero for the real estate crisis.”
He’s using $400 in monthly savings to put more money into retirement investments and accelerate mortgage principal payments.
At the same time, Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said most homeowners won’t resist adjusting their spending higher.
“Consumers tend to view their spending based on their cash flow situation,” he said. “It is a big deal in Florida.”