Could 4.5% Refis Be a Balm for Mortgage Crisis?

August 22, 2010

American Banker | Friday, August 20, 2010

By Brad Finkelstein and Bonnie Sinnock

All homeowners current on their mortgages need to be refinanced into a loan with a 4.5% interest rate to help the economy, said Ted Jones, the chief economist at Stewart Title Guaranty Co.

He provided what he called his "no tax" solution to the mortgage crisis on Wednesday during a meeting of the California Association of Mortgage Professionals in Long Beach, Calif.

Jones discussed a similar proposal at the group's convention in 2009, but mass refis may be more plausible today.

Freddie Mac's weekly survey found that the average 30-year fixed mortgage rate in the week that ended Thursday once again dropped to a new low. The rate has fallen at a pace that could theoretically benefit even borrowers who got loans relatively recently.

While rate moves have generally not been dramatic from week to week, collectively they mean borrowers who took out mortgages just a couple of months ago could save $150 to $200 a month if they refinanced again, Freddie's deputy chief economist, Amy Crews Cutts, said in an interview.

However, she said, anecdotal evidence suggests that lingering problems from the downturn, combined with some borrower numbness to persistent record-low rates, could continue to prevent a good number of homeowners who might otherwise benefit from refinancings from doing so.

Jones said during his presentation that the solution for homeowners must be a refi, not a "reset" that cuts the principal owed. The current balance must be maintained because lenders should not lose money, he said.

The program should include jumbo loans and the borrower would not be allowed to take cash out. Freddie and Fannie Mae should buy all the loans and guarantee repayment of principal after three years.

With a $175,000 loan amount, the average household would save $3,500 a year, he said.

"We definitely need the GSAs," Jones said, deliberately misspeaking, redefining the government-sponsored enteprises Fannie and Freddie as government service agencies.

Housing is still the nation's backbone, Jones said. But the Clinton administration's housing program, which resulted in Fannie and Freddie purchasing "bad" loans, was "wrong."

The two companies are worth "a couple of trillion" dollars to U.S. taxpayers, he continued.

If they go away, interest rates would rise, so there is a need to keep Fannie Mae and Freddie Mac as government service agencies, Jones said. (His title company is a unit of Stewart Information Services Corp.)

According to Freddie's survey, in the week that ended Aug. 19 the average rate for a 30-year fixed-rate mortgage dropped to 4.42% from 4.44% the previous week and 5.12% a year ago.

The average 15-year fixed mortgage rate also was a record low, 3.90%. That was down from 3.92% the previous week and from 4.56% a year ago.

The average rate for a five-year Treasury-indexed adjustable-rate mortgage during the week that ended Aug. 19 remained at its record low of 3.56% for the second consecutive week, down from 4.57% a year ago.

At 3.53%, the average rate for a one-year Treasury ARM during the week that ended Aug. 19 also was unchanged from last week. A year ago the rate was 4.69%.

Average points were 0.7 for 30-year fixed-rate mortgages and one-year Treasury ARMs, and 0.6 for 15-year fixed-rate mortgages and five-year Treasury hybrids.