Refinancing could all but disappear — act now!by Tim Manni
I want to examine three separate issues that could possibly kill refinance demand entirely: Underwater homeowners, a requirement in the proposed definition of a qualified residential mortgage (QRM) and mortgage rates.
Underwater borrowers = No refis
Ever since home prices entered into a free fall, this country has been socked with an epidemic of negative home equity. The latest estimates pin nearly one in four borrowers as owing more on their mortgages than their homes are worth. While some of these homeowners are in worse financial straits than others, a common theme among all underwater borrowers has been the inability to refinance. Since a sufficient rise in home prices isn’t likely in the works for some time, one of, if not the only options left for these homeowners to possibly improve their financial situation would be to refinance at current mortgage rates.
Unfortunately, lenders haven’t shown much interested in refinancing underwater borrowers. Several attempts at reaching this audience via various programs or mechanisms (FHA Short Refi program, proposed principal reductions, higher loan-to-value ratios [125 percent] etc.) have all failed to make any significant impact.
So right there, that’s about 25 percent of the market that has largely been shut out of refinancing.
QRM refi: How many could actually qualify?
When federal regulators opened up their proposed definition of a QRM for comment recently, we got a real good sense of what refinance-qualification standards might be like in the coming future. As the definition stands now, if a borrower wishes to refinance into a QRM, they must have at least a 25 percent equity stake in their home.
That’s a substantial and potentially damaging benchmark for a few reasons:
- About 25 percent of homeowners already have negative equity, let alone zero equity. Not many American homeowners are going to have an equity stake that large.
- It would take homeowners years to establish that much equity. With a mortgage rate of 5 percent on a $100,000 home ($80,000 mortgage), it will take a homeowner over four years to have enough equity to qualify for a QRM refi (assuming no home price appreciation). At 6 percent, it becomes almost five years, and a little more than 5 years with a 7 percent mortgage rate.
“This loan-to-value clause/structure may prevent many very good homeowners with deep equity positions the ability to take advantage of low-rate refinancing opportunities,” explains HSH.com VP Keith Gumbinger.
If mortgage rates rise, goodbye refi
The refinance demand in this country centers mainly on one thing: mortgage rates. When mortgage rates are falling, homeowners scramble to get refis. When mortgage rates rise, refi demand tends to come to a screeching halt.
Market analysts, HSH.com included, have been projecting mortgage rates to rise for over a year now. While stagnant economic growth and global events (e.g. Japanese disasters) have served to keep rates tempered for some time, the fact remains that mortgage rates will eventually rise. Once that happen, wave goodbye to refi demand.
These three factors, combined with the fact that mortgage rates have already been so low for so long, could mean the refinance market in this country dries up almost entirely in the coming future. That’s why if you’re still sitting on the sidelines and can qualify, get your paperwork in order and refinance to today’s low mortgage rates.