October 10th, 2012 at 10:19 am

A few weeks ago, I argued that there’s a potentially useful collision of a number of trends occurring in the housing market:

–mortgage rates are hitting historical lows;

–home prices are finally appreciating;

–refis are up.

These developments have a lot in common, of course.  First, they interact in positive ways for borrowers and for the economy.  As home prices appreciate, some underwater homeowners will break the surface (last I checked, there were 1.3 million such cases through the first half of this year).  That helps them refinance their home loans into lower rates.

Even for underwater borrowers, an Obama administration housing program—the HARP—is finally gaining some real traction helping underwater borrowers to refi.  As Mark Zandi noted in the WaPo the other day:

The administration has also succeeded in ramping up its Housing Affordable Refinance Program. HARP makes it easier for homeowners with Fannie and Freddie mortgages to refinance their loans even if they are deeply underwater. HARP was stalled until the administration persuaded Fannie Mae and Freddie Mac to make some changes; now, with the help of record-low mortgage rates, HARP has gone into overdrive. Assuming mortgage rates stay low, nearly 3 million homeowners will eventually benefit from the program.

That’s where the Federal Reserve comes in: their QE3 program is helping to push already low mortgage rates down even further (by adding liquidity to the mortgage backed securities market).  Last I checked, the average borrowing rate on a 30-year fixed rate mortgage was 3.36%, the lowest on record from this data series that goes back to the mid-1970s.

There’s something else these trends have in common: they’re all in no small part the result of public policy targeted at the housing market.  There have been many policy interventions targeted at offsetting the very deep market failure in housing, and while it’s definitely taken them too long to take hold, these measures are finally helping in ways that could give this sloggy economy a useful boost.

How?  One way is through refi’s that can significantly lower a borrower’s monthly payment.  HUD data through the first half of this year show the typical refinancer reducing their yearly mortgage payments by around $2,200 (those with refis through HARP very likely do better than average since they’ve been locked out of the refi market for so long while rates  have tumbled).   That’s real money to middle-income families and real stimulus to the economy at a time when fiscal policy is actually—and wrongheadedly—contractionary.

Moreover, the MBA’s refinancing index is growing strongly, especially in states where home prices got whacked the hardest.  Their index of applications is at a three-year high, and its growth over the past year in the nation and a number of states with the largest shares of underwater mortgages is shown the figure below.

Applications for refis in Nevada, Florida, Arizona, and Michigan have all more than doubled over the past year, with Mississippi and Georgia not too far behind.  Among the states with the biggest home price declines, only California is a refi laggard.  Of course, in a housing market that’s just crawling out of the primordial soup left by the bursting of the massive housing bubble, these growth rates are off of very low bases.  But in the context of the housing market dynamic described above, they’re still good to see.

The housing market is not out of the woods yet, for sure, and there are still millions of foreclosures in the pipeline.  But if these three trends continue to favorably interact, they should help things look up a bit for a lot of homeowners who’ve been looking down for way too long.

Source: Mortgage Bankers’ Association

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6 comments in reply to "Refis!"

  1. mitakeet says:

    Our conundrum is that we have a second mortgage that, when combined with the first, put us under water until just recently (based on Zillow, for whatever that is worth). We sought to refinance, combining the first and second, and thus save nearly $1K per month, yet it seems to pay off the second mortgage that is a ‘cash out’ scenario and thus falls under the 80% LTV situation. Somehow I don’t feel like we are alone in this situation, but as far as I can tell, there isn’t any sort of program to help us out. If someone knows something that might help I would love to hear about it. BTW, our loans are not held by Freddie or Fannie, we got them through our credit union, though the documents we signed did say they could sell the loans at any time.

    • Jared Bernstein says:

      Well, I try not to do retail here for good reason! But I used to be ensconced in this stuff and it does look like you’re in a weird situation that should be fixed–and policy makers are trying to fix it.

      All major lenders have agreed to automatically resubordinate their second mortgages behind firsts for HARP refis. So this means you do not have to write down the first to refi. But with your first below 80, you’re stuck with too much equity to be eligible!!! Sen Menendez has legislation to fix this and so are Fan/Fred so check back with them soon.

  2. no_body says:

    There is a much more direct way the Fed could create jobs using QE3. All the Fed has to say is six little words, “The Fed will buy PACE Bonds”.

    Property Assessed Clean Energy bonds are the exact same financial vehicle used to pay for schools, sewer upgrades and are paid back through property taxes.

    This would jump start the economy by putting an estimated 3 million construction workers back the job, retro-fitting homes or ten permanent ones per million. Lower our trade deficit. And the Fed could even charge the homeowner only 3% interest and return the profit to the Treasury to reduce the public debt.

    I know the Fed can’t create an asset class directly. But the Fed buying them would eliminate the problem with F&F, investors and the first lien position. Because the Fed owns a trillion of F&F securities anyway, the Fed will make money either way. By the Fed purchasing $40 billion a month is the perfect vehicle to provide a controlled boost to the economy. And could easily be withdrawn once the economy recovers.

    What’s more, when a house is underwater long-term investments in them are put on hold. This would eliminate the need to wait for housing prices to recover before investments are made. Also in CA the average increase in property value of a house with a CV system is $17k.

    Finally, PACE bonds enjoy broad bipartisan support at both the state and local levels.

    • mitakeet says:

      Your idea of the FED buying PACE bonds makes a lot of sense, but why not also have the FED buy muni bonds as well? I bet lowering the interest rate on munis would give a big shot on the arm for a lot of state and local communities and also result in a jumpstart to the economy. I am confused with this focus on mortgage rates when they are already at historical lows. While I can see that refis would pump some money into the economy, wouldn’t creating more jobs have a greater multiplier effect than mortgage refis for the same investment on the FED’s part?

      • no_body says:

        I don’t think the Fed can buy munis. But it can buy back corporate bonds and mortgage backed securities held by banks or other financial institutions. Due to the Savings and Loan crises of the 1990s. And PACE bonds are mortgage backed securities. Ideally then the state would create a state bank like North Dakota has and funnel the PACE bonds through it. Which could also handle munis it if wanted to lower rates.

  3. Bill Gatliff says:


    I heard on a Marketplace (radio show) discussion the other day that 70% of mortgages taken shortly before the onset of the recession were people taking out accumulated equity in their houses, and not new mortgages as we have all been told.

    Were they doing this to maintain their lifestyles? To provide income during job loss? Is it possible to even know?

    I’m thinking that there must be implications in the above that would factor into how people might react to mortgage policy changes and the overall economic recovery. For example, these people loaded up on debt just before home values tumbled, which doubled the damage to their bottom lines.