Mortgage rates fall and fuel another refinancing boom

The housing market may finally be getting some much-needed relief, with lower mortgage rates already encouraging refinancing and government officials considering ways to entice new buyers.

The Federal Reserve recently announced that it would buy $500 billion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.

Mortgage rates immediately dropped, and that led to a surge in mortgage refinancing activity. Refinancing activity accounted for 69.1 percent of all mortgage applications submitted two weeks ago, up from 49.3 percent the week before.

"We did quadruple our normal volume," said Bob Walters, chief economist of Quicken Loans.

"We had loan officers staying past midnight to get back to all of the people that had been calling. There is still a silent majority of people who can refinance and qualify."

Callers cited a variety of reasons for their new interest in refinancing, mortgage lenders said.

But the main reason was that they wanted to lock in a lower mortgage rate and reduce their monthly costs in case they fell victim to the economic downturn.

Others were looking to extract cash to pay down more-expensive credit-card debt, the lenders said, and some were trying to trade in their adjustable-rate mortgages for a fixed rate.

Annie Lu, 30, a nurse practitioner in Brooklyn, said she had called about refinancing when she heard that the economy was officially in a recession.

She and her husband bought their house about three years ago with a mortgage rate of 6.25 percent. She is hoping to qualify for a rate almost one percentage point lower.

"It is good to prepare for the worst, and nobody minds saving as much as we can," she said.

As rates drop, more people, in theory, qualify for loans because their monthly principal and interest payments will be lower.

But to qualify for the best rates, borrowers need to have impeccable credit — or a credit score of 720 or higher — as well as at least 10 to 20 percent of equity in their homes.

And while experts said they were heartened by the pickup in activity, the overall number of refinancings this year was expected to be only slightly more than a quarter of the volume at the height of the housing boom in 2003.

"It is not going to spike up rapidly or anywhere near as it has in the past because credit is still tight, the economy is still weak and there are fewer people that could refinance now than could before," said Celia Chen, senior director of housing economics at Moody's Economy.com.

"But the decline in rates will help those that can."

For all the renewed interest in refinancing, about 12 million households, or 15 percent of owners of single-family homes, are not eligible. Their mortgages exceed the value of their homes, Chen said.

Meanwhile, entire categories of loan products have been eliminated.

Subprime loans are not available along with stated-income loans, where borrowers do not have to fully document their income.

That has limited the options for many small-business owners and other self-employed individuals.

People with inconsistent or unpredictable incomes, like those who rely on commissions, are also affected.

"You can imagine how many inquiries we get where we are done just as soon as we are done talking," said Rick Dunham, vice president of Impact Mortgage Network in Mesa, Ariz., whose clients include small-business owners as well as individuals.

"So we go to the next step and say, 'OK, your options are loan modification, short sale or nothing at all.' "