Prime Time: A Resurgence Begins in Mortgage Refinancing

The Wall Street Journal

Another mortgage-refinancing boom is under way. But this time around, many homeowners will be watching from the sidelines.

For the first time since 2005, mortgage rates have slipped well below 6%, ending last week at about 5.87%, according to mortgage tracker HSH Associates. Some lenders are offering even lower deals. At these levels, about 37% of homeowners could refinance their mortgages and save money on their monthly payment, estimates investment bank Bear Stearns Cos. As rates drop further -- and some expect that to happen if the economy continues to weaken -- increasing numbers of consumers will find refinancing their existing mortgage worthwhile.

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But here's the catch, and it's a big one: Many homeowners won't benefit, either because their mortgage is too big or their credit score is too low. In other cases, falling home prices will make it tough for them to refinance.

As the subprime-lending crisis continues to roil the housing and financial markets, rates for so-called jumbo mortgages -- those above $417,000 -- are now uncharacteristically priced so far above conventional mortgages that refinancing generally makes no sense for homeowners who hold them. At the same time, conventional borrowers who have lower credit scores -- or relatively little equity in their houses -- are finding that they generally don't qualify for the best rates, often negating any expected benefits to the pocketbook.

The result: The big winners will be conventional borrowers with so-called conforming loans -- those eligible for purchase by Fannie Mae and Freddie Mac, the two government-sponsored entities that rule the mortgage market. In particular, borrowers with high credit scores or a large amount of equity already in their home, or some combination of both, stand to benefit, says Dale Westhoff, who heads Bear Stearns's mortgage research. In the past, when rates have dived below 6%, "you'd normally see subprime and Alt-A and jumbo borrowers" in the market, Mr. Westhoff says. "But they're really not going to be participants in this refi wave."

Fiona Furlong of South Glastonbury, Conn., is one borrower who has been able to refinance her home. She originally sought to refinance her conventional mortgage in December 2005, but missed the last of the sub-6% rates by a few weeks. She told her mortgage broker to keep her in mind if rates ever slipped below 6% again.

"When he called recently, I had sort of forgotten about this," Ms. Furlong says. "I was surprised to hear rates have dropped so significantly." She locked in a rate of 5.75%, reducing her current rate from above 6%, a move that will shrink her monthly payment by about $100. "My house just got reappraised and I'll be paying more in taxes, so that savings will help," she says.

Ms. Furlong's broker, Michael Menatian, president of Sanborn Mortgage Corp., in West Hartford, Conn., says his refinancing business is "surging" these days among those who qualify. "It's going nuts, because we've had such a dramatic drop in rates in such a short time."

At Regions Financial Corp., a Birmingham, Ala., regional bank, refinancing business is up between 40% and 45% since October. "This market will be very different than previous markets, and that's a function of the credit constraints and the jumbo-rate issues," says Todd Chamberlain, Regions's head of mortgage banking.

Ron Hermance is more blunt. The chairman and CEO of New Jersey's Hudson City Bancorp Inc. says many consumers "will be left out in the cold this time because underwriting is back in vogue," and many homeowners will find that during the previous housing boom "they originally got credit they weren't entitled to." In the first two weeks of this year, refinancings accounted for 56% of Hudson City's mortgage volume, compared with 42% for all of last year.

Overall, the Mortgage Bankers Association reports that for the week ended Jan. 11, weekly mortgage applications surged to a level not seen since spring 2004. Refinancings accounted for nearly two-thirds of the application volume, the group says. Still, those are just applications, and many are being rejected these days as lenders adopt tighter standards.

For jumbo borrowers, though, higher standards aren't the biggest problem: Rates on those loans averaged 6.8% at the end of last week, according to HSH, meaning the spread between conventional and jumbo rates is nearly a full percentage point -- four times the typical gap.

Jumbo rates, lenders say, aren't coming down alongside conventional rates because buyers of those mortgages in the secondary market remain skittish. As such, today's jumbo rates are well above the existing rates many homeowners currently have on their mortgage, meaning "there's no reason to refinance," says Jay Steren, CEO at Mortgage Capital Associates, a Los Angeles mortgage banker.

In the conventional-mortgage market, Fannie Mae and Freddie Mac are moving to risk-based pricing, which has the effect of tightening lending standards across the country. The upshot: Homeowners with weak credit scores or little equity in their home will pay for the risk associated with underwriting their mortgage through higher interest rates and added fees -- which has the effect of dimming, if not eliminating, the benefits of refinancing.

To get the best rates under the new risk-based guidelines, homeowners "need a credit score over 679, or equity of greater than 30%," says Sanborn Mortgages' Mr. Menatian. But as home prices fall in many markets, homeowners' equity sinks alongside it -- making it tough to get more-attractive rates.

The risk-based guidelines impose so-called delivery fees that range between 0.75% and 2% of the mortgage value for consumers with credit scores below 680. The highest fees are charged to those with credit scores below 620.

Mr. Menatian says buyers with credit scores in the 620 to 639 range, and who have less than 30% equity, are getting mortgage rates these days of about 6.375%, while the best borrowers are getting 5.75%.

Holders of jumbo mortgages, meanwhile, are running into other problems. Rodney Rideout, of Darien, Conn., has an adjustable-rate mortgage of about $500,000 scheduled to reset in March, meaning his interest rate will rise to more than 6%. That will bump up his monthly payments by about $460. He wants to refinance, but because of the jumbo market, he's unable to find an affordable fixed-rate mortgage.

"Everything is up near 7%, so it makes no sense," says Mr. Rideout. "I was thinking 'jumbo' meant something up near $1 million; I didn't think it would apply to my loan."

Indeed, the definition of jumbo could actually be changing soon. For months, Congress has been debating the idea of raising the limit on jumbo mortgages, possibly to $600,000 or more. If so, that would allow a larger number of borrowers to refinance at lower rates. But just what will happen, and when, remains uncertain.

In the meantime, rates on jumbo mortgages can vary significantly. While the average jumbo rate is about 6.8%, Hudson City Bancorp -- which operates in New Jersey, New York and Connecticut -- is offering jumbo mortgages at 6.25%, for example.

"You need to do some legwork, scour the market, to find the best rates," says Keith Gumbinger, vice-president of HSH. He suggests starting with lenders who often keep on their books the mortgages they underwrite, such as local banks, thrifts and credit unions. "They can easily be a half-percent lower than the averages," he says.

All of this is affecting the home-buying market, particularly for expensive homes. Buyers are increasingly aware of the high jumbo-mortgage rates and the impact on their monthly payment. Thus, sellers these days are adjusting their sales price or offering other incentives in order to trim a buyer's mortgage below the jumbo limit.

Neil Saunders, president of Greenwich Mortgage Corp. in Providence, R.I., is selling a 4,400-square-foot house in East Greenwich, R.I., priced at $998,000. To entice buyers, he's willing to offer an interest-free loan for a year or two on the cash needed above the $417,000 cutoff. Mr. Saunders expects Congress will raise the ceiling on jumbo mortgages and the buyer will then be able to refinance into a lower-rate, conventional mortgage.

Other sellers, says Ron Phipps, president of Phipps Realty and Relocation in Warwick, R.I., are buying down the interest rate for buyers, often for just a year or two, to make it more comparable to a conventional rate.

"Everyone is very sensitive to this situation right now," Mr. Phipps says. "This is still a correcting market."

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