The Mortgage Corner

There is growing optimism that the real estate bust is finally at an end. The cause is a combination of record low interest rates leading to more refinance activity and increasing confidence of consumers in the economic recovery. For the first five months of 2012, more than 78,000 homeowners who owe more than 105 percent of their property’s value have refinanced using the government’s Home Affordable Refinance Program, or HARP. That was up from about 60,000 in all of 2011, the Federal Housing Finance Agency said in a recent report.

Much of it is due to HARP 2.0 that removed loan to value caps on mortgage amounts higher than the property value. The removal of the 125 percent LTV cap and certain risk-based fees for refinancing enabled more underwater borrowers to access refinancing through HARP 2.0. HARP volume represented 20 percent of total refinance volume in May, the highest percentage reported since the inception of HARP. One in five refinanced loans in May was originated through HARP, according to the FHFA.

Borrowers with LTV greater than 105 percent accounted for 32 percent — or almost one third — of HARP volume, up from 15 percent in 2011. In addition, an increasing number of underwater borrowers chose shorter-term 15- and 20-year mortgages, which build equity faster than traditional 30-year mortgages.

clip_image002

Graph: Calculated Risk

Interest rates in California have dropped as low as 3.375 percent for conforming 30-year fixed to $417,000 and 3.625 percent for jumbo conforming fixed rates to $625,500 for owner-occupied single units with zero points origination fees.

This is why the MBA’s Refinance Index increased 22 percent from the previous week and is at the highest level since mid-June. The seasonally adjusted Purchase Index decreased 0.1 percent from one week earlier, though builder optimism jumped another 6 points to 35, the highest level since March 2007, according to the National Association of Home Builders.

“Combined with the upward movement we’ve seen in other key housing indicators over the past six months, this report adds to the growing acknowledgement that housing – though still in a fragile stage of recovery – is returning to its more traditional role of leading the economy out of recession,” noted NAHB Chief Economist David Crowe. “This is particularly encouraging at a time when other parts of the economy have begun to show softness, and is all the more reason that the challenges constraining housing’s recovery – namely overly tight lending conditions, poor appraisals and the flow of distressed properties onto the market – need to be resolved.”

Calculated Risk reports that “Refinance application volume increased last week to near peak levels for the year as mortgage rates dropped to a new low, driven down by growing concerns about the health of the US economy,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Applications for HARP refinance loans accounted for 24 percent of refinance activity last week, in line with the HARP share for the past few weeks.”

Consumers seem to be doing fine, as I said last week, in spite of their worries about jobs, the economy and budget deficits (their own more than governments’). Consumer credit jumped $17.1 billion in May for the largest increase since the $19.1 billion boost seen in November 2011. Gains for the latest month were seen in both revolving and nonrevolving credit.

And the U.S. Census Bureau reports that Privately-owned housing starts continued their monthly increase in June, at a seasonally adjusted annual rate of 760,000, the highest rate since October 2008. This is 6.9 percent above the revised May estimate of 711,000 and is 23.6 percent above the June 2011 rate of 615,000. Single-family housing starts in June were at a rate of 539,000; this is 4.7 percent above the revised May figure of 515,000. The June rate for units in buildings with five units or more was 213,000.

clip_image004

Graph: Calculated Risk

Why have interest rates continued downward to the lowest levels since World War II? We can thank the nervousness of foreign investors worrying about recessions in Europe and China that are parking their money in U.S. Treasury Bonds. The 10-year benchmark bond yield has dropped to 1.5 percent, which sets the level for mortgage rates. So where else are investors looking to make money? In real estate, it seems.

Harlan Green © 2012