Friday, July 3, 2009

Rising Mortgage Rates Do Little to Build Consumer Confidence

Just when the housing market finally began to show signs of recovery, home buyers got hit with another blow. Mortgage rates are on the rise. One of the biggest challenges in overcoming this economic crisis has been to restore confidence and create a climate where prospective buyers feel comfortable venturing back into the investment game. Now just when we all thought it was safe to go back into the water, mortgage rates jump the highest they've been since last November.

Last Wednesday, the rates for 30-year fixed-rate mortgages rose from 5.46% to 5.70%. Not such a big deal, you say? According to FTN Financial, that little jump will cut the number of borrowers wanting to finance, in half. The number of home owners seeking refinancing has also decreased. According to a representative from J.P. Morgan Chase & Co., "A rate of 4.75% "seemed to be the switch" that turned on refinance activity, he says. Now, rates are a full percentage point higher."

Other increases included: 15-year fixed from 5.02% to 5.27%; 30-year fixed jumbo from 6.56% to 6.73%; 5/1 ARM from 4.59% to 4.87%; and the 7/1 ARM from 5.01% to 5.15%.

The reason for this increase are the rising bond yields that reached 4% last week. Some say this is a sign that the economy is leveling out, where others say investors are nervous and seeking more long term, secure investments.

In any event, rising rates do nothing to encourage the recent program designed to help homeowners refinance their mortgages. HARP, or Home Affordable Refinance Program, allows those in situations where they owe between 80% and 105% of their home's value, to refinance at new lower rates. It was projected that the program could help almost five million homeowners ease their monthly payment.

Apparently, public response to HARP, was much lower than expected and now that rates are on the rise, will probably not get much better. HARP was plagued with administrative issues that led to many applications being denied or never considered, and the program had difficulty gaining needed momentum to achieve its lofty goals. Qualifying loans had to be guaranteed by Fannie Mae or Freddie Mac. Just under 13,000 refinancings were completed, and over 17,000 still need to be processed. The average savings reduced mortgage rates by 1.3 to 1.5 percentage points. Those who have mortgage insurance, are not eligible according to this version of the program, but future changes are in the works.

HARP was developed in response to the many borrowers who were unable to refinance due to lack of equity in their homes. Many had purchased when prices were high, and when values dropped, were left with mortgages higher than the property's current market value. The rising interest rates will do little to help these homeowners.

Not surprisingly, the numbers for home purchases has remained stationary since the rates started to rise. Even though current rates are lower than last year's, when they sat at about 6.32%, people have found yet another reason not to commit to a long term investment.