Interest Rates Vs. Mortgage Rates Adds Up To More Frustration
Thursday, March 06, 2008GHARIB: A new report today shows American homeowners now have the lowest share of equity in their homes on record. The Federal Reserve says homeowner equity dipped below 50 percent in the second quarter of 2007. That's the first time this has happened since the Fed started tracking the data back in 1945. The total value of equity has also fallen for a third straight quarter. Economist Jack Albertine says declining equity will cut into consumers' appetite for spending.
JACK ALBERTINE, MANAGING DIR., ALBERTINE ENTERPRISES: Consumers were using equity in their houses to buy durable goods -- automobiles, appliances and other things. Now, they're not going to have the resources to do it, so it's another blow to the consumer.
GHARIB: Albertine says that consumer spending could be affected for the next year to 18 months, but he expects spending to return to normal once homeowners' equities begin to rise.
KANGAS: As home equity is going down, the number of Americans at risk of losing their homes is going up. The Mortgage Bankers Association reports the number of homes in foreclosure and homes entering the process hit their highest levels ever late last year. The rate of loans heading into foreclosure jumped to 0.83 percent. That's way up from 0.54 percent a year earlier. The spike in foreclosure starts now spans all loan types, as both prime and sub-prime loans saw fourth quarter increases. California and Florida continue to represent a disproportionate share of the country's foreclosure starts.
GHARIB: Federal Reserve has been cutting interest rates, but the benefits haven't necessarily trickled down to everyone. Interest rates on 30-year fixed rate mortgages have been rising in recent weeks after declining in January. As Diane Eastabrook reports, that's frustrating homeowners hoping to refinance.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: In late 2006, Bill Bishop closed on a two-bedroom condominium in this high rise just outside of Chicago. At the time, he got a 30-year fixed rate mortgage with a 6 percent interest rate. When rates on similar loans began falling below 5.5 percent this January, Bishop hoped to refinance his mortgage. But he was too late.
BILL BISHOP, HOMEOWNER: They've done nothing but up since that point in time, but with an oncoming potential recession, that should help drive rates down in the long term.
EASTABROOK: In early January, interest rates on 30-year fixed rate mortgages began falling. That prompted a flood of refinancing and an up- tick in the Mortgage Bankers Association refinance index. But since late January, interest rates on those loans reversed course, slowing refi activity to a trickle. So, what happened?
Economists say the 10-year Treasury bond is part of the reason. Long- term mortgage rates are tied to those bonds and interest rates on those bonds have been rising. Risk premiums are another reason. Ibbotson associates chief economist Michele Gambera many lenders are adding risk premiums to mortgages because of concern over the U.S. housing market.
MICHELE GAMBERA, CHIEF ECONOMIST, IBBOTSON ASSOCIATES: Delinquencies have been going up rather steadily for the last four or five quarters and therefore, that might be the fact that the banks are trying to jack up the spread a little bit to make sure that they might be compensated for any delinquencies that might occur.
EASTABROOK: Russ Haraus, risk management chairman for the Illinois Mortgage Bankers Association, thinks refi activity will be stuck in neutral as long as interest rates hover around 6 percent.
RUSS HARAUS, RISK MANAGEMENT CHMN., IMBA: The consumer is very savvy. Our consumer is very keenly aware of interest rates and when the interest the rate goes above 6.25, 6.5, you start to see a pull back from the market and that is what you are seeing now.
EASTABROOK: Some economists think interest rates on 30-year fixed rate mortgages will continue to be volatile throughout the spring, especially if mortgage delinquencies keep rising, putting additional pressure on lender balance sheets. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
KANGAS: Many people looking to buy high cost homes are now eligible for mortgages backed by Fannie Mae and Freddie Mac. The mortgage giants will offer loans of up to $729,000 for single family homes in 220 cities. The increased limits are part of the economic stimulus plan signed into law last month and are temporary, lasting through the end of this year. The previous loan limit was $417,000. The move is aimed at boosting the strapped mortgage market.
