Rates on 30-Year Loans Drop Again

Rates for 30-year home loans edged down for the third-straight week and are close to record lows reached over the spring, providing an excellent opportunity for borrowers to save money by refinancing their home loans.

The average rate for a 30-year fixed mortgage was 5.04 percent, down from 5.07 percent a week earlier, mortgage company Freddie Mac said Thursday. Rates, while above the record low of 4.78 percent hit in the spring, are still attractive for people looking to buy a home or refinance.

It was the lowest weekly average since the week of May 28, when rates averaged 4.91 percent.

To prop up the housing market and help the economy revive from the worst recession since the 1930s, the Federal Reserve is spending $1.25 trillion on mortgage-backed securities, which has driven down rates on home loans.

That money is set to run out by winter, though some analysts expect the central bank to add more money to the program or allow it to last longer by gradually reducing its purchases.

Sung Won Sohn, an economics professor at California State University, Channel Islands, said rates are likely to stay low for another six months or more, because the central bank does not want to imperil a recovery in the housing market and the overall economy by acting too quickly.

“That would be economically and politically unwise,” Sohn said.

Despite an extraordinary level of government intervention to prop up the mortgage market, qualifying for a loan is still tough. Lenders have tightened their standards dramatically, so the best rates are available to those with solid credit and a 20 percent downpayment.

Freddie Mac collects mortgage rates on Monday through Wednesday of each week from lenders around the country. Rates often fluctuate significantly, even within a given day.

The average rate on a 15-year fixed-rate mortgage fell to 4.47 percent, from 4.5 percent last week, according to Freddie Mac. That was the lowest level on records dating to 1991.

Rates on five-year, adjustable-rate mortgages averaged 4.51 percent, unchanged from a week earlier. Rates on one-year, adjustable-rate mortgages fell to 4.58 percent from 4.64 percent.

The rates do not include add-on fees known as points. The nationwide fee for loans in Freddie Mac’s survey averaged 0.7 point for 30-year loans and 0.6 point for 15-year mortgages. The fee averaged 0.5 point for five-year and one-year loans.

Source: The Associated Press

U.S. Net Worth Grows for First Time Since '07

The Federal Reserve reports that Americans actually got a little wealthier for the first time since 2007. Household wealth grew by $2 trillion, or about 4 percent, this spring, ending the longest stretch of quarterly declines on records dating back to 1952.

Net worth – the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards – came to $53.1 trillion for the second quarter.

Stock portfolios came back to life this spring after the market hit its lows for the year in March, and home prices have stabilized. But the collective American wallet is still almost 20 percent thinner than it was when net worth peaked two years ago.

Some analysts say it could take as long as four years for households to recoup trillions in losses and get back to where they were before the downturn struck in December 2007.

The Associated Press has the following article on Friday:

“Households saw $14 trillion of wealth get blown away by the recession, and they recouped $2 trillion of that in the second quarter. That’s good news,” said Brian Bethune, economist at IHS Global Insight. “But they still have another $12 trillion to go to get back to where they were.”

Many analysts expect the economic recovery to be lethargic, limiting further gains in the stock and housing markets. That’s why Scott Hoyt, senior director of consumer economics at Moody’s Economy.com, thinks household wealth won’t rise back to pre-recession levels until 2012 or 2013.

“It is going to take a while for Americans to regain lost ground and become as comfortable as they were before all this started,” Hoyt said.

Even if the economy continues to improve, analysts say the erosion of wealth will keep Americans thrifty for years. In fact, even as wealth grew, Americans trimmed their spending slightly in the spring.

The increase in wealth in the second quarter was led by stock portfolios, the Fed report said. The value of Americans’ stock holdings rose almost 22 percent from the first quarter – the first increase in two years.

Higher home prices helped, too. The value of real-estate holdings rose 1.8 percent, the first gain since the end of 2006. Home prices are still about 30 percent below their 2006 peak.

Home equity, the market value of a home minus what’s still owed on the mortgage, has been dropping in recent years – first because more Americans used their homes to get loans and now because of falling home prices.

Collectively, U.S. homeowners had just over 43 percent equity in their homes in the second quarter, up only slightly from a record low in the first quarter. Moody’s Economy.com estimates nearly a quarter of all U.S. homeowners owe more on their mortgages then their homes are worth.

This week, Fed Chairman Ben Bernanke said the worst recession since the 1930s is probably over. He warned that the pace of recovery probably won’t be brisk enough to generate solid job growth and keep the unemployment rate – now at a 26-year high of 9.7 percent – from rising further.

Retail sales jumped in August by the most in more than three years. But rising unemployment, the reduced wealth and still hard-to-get credit are expected to keep people cautious about spending in the months ahead.

Households are trimming their debt loads, too. Total household debt – including mortgages, credit cards, autos and other consumer loans – stood at $13.7 trillion in the second quarter, the Fed report said. That’s down slightly from $13.8 trillion in the first three months of this year.

Debt peaked at $13.9 trillion in the spring of last year.

Americans’ savings rate – savings as a percentage of after-tax income – rose to 5 percent in the second quarter, according to Commerce Department figures. Analysts believe households are using that money to whittle down their debt.

Source: Federal Reserve, The Associated Press

Government Helps Keep Loans Cheap – If You Can Get One

It’s a good time to borrow money for a home, car or small business. A year after a global freeze in the credit markets prompted massive government intervention to prevent the financial system from collapsing, interest rates remain at historic lows. But banks are demanding more collateral, bigger downpayments and detailed financial histories from borrowers.

And that’s for people with good credit. Everyone else need not apply.

The stingy lending is likely to last.

The Associated Press published the following article on Friday:

“Banks are going to be in a defensive posture for several years. Most borrowers can’t meet their criteria,” says Christopher Whalen, managing director at research firm Institutional Risk Analytics.

No segment of borrowers has been spared:

• Nearly seven of 10 mortgage applications were approved and financed during the housing boom five years ago. At the end of 2008, the number was down to five.

• Revolving credit, which is primarily made up of credit card debt, declined by $6.1 billion, or 8 percent on an annualized basis, in July. That’s a sign consumers are having difficulty obtaining credit and are cutting back on spending.

To be sure, it is cheaper for businesses and consumers to take out a loan today than it was at the height of the crisis last fall.

The average 30-year mortgage rate stands at 5.04 percent after falling to a record low of 4.78 percent in April. The overnight rate that banks charge each other to borrow money – a key indicator of the credit markets’ overall health – has plummeted. The London Interbank Offered Rate, or LIBOR, stands at 0.29 percent today. It soared above 6 percent last September when fear threatened to choke off lending throughout the financial system.

But those improvements are somewhat misleading. Lending – especially for homes – is being greased by trillions of dollars the federal government has made available to banks.

The Federal Reserve has provided nearly $340 billion in low-cost loans for banks. It has purchased $625 billion worth of mortgage-backed securities to drive down interest rates on home loans. The Federal Deposit Insurance Corp. is guaranteeing about $300 billion in bank debt, which enables banks to borrow at lower rates.

No one wants to see a return to the easy credit that led to the financial crisis. The question is when will credit return to normal – not too loose, not too tight and not propped up by the government?

Not soon, financial analysts and government officials say.

“We will not make the mistake of prematurely declaring victory or prematurely withdrawing public support for the flow of credit,” says Lawrence Summers, the White House’s top economic adviser.

Some analysts think it could take four or five years for the Fed to withdraw the money entirely and shrink a balance sheet that is now about $2 trillion, more than double what it was when the financial crisis struck.

The government’s role in steadying the housing market is huge. Home sales are rising, but more than two-thirds of U.S. mortgages made in the first half of this year were later sold to Fannie Mae and Freddie Mac, which are 80 percent owned by the federal government. Three years ago, Fannie and Freddie’s combined share was 33 percent, according to Inside Mortgage Finance, a trade publication.

Some financial analysts fear what will happen as the government winds down its lending programs. These analysts say banks have become so hooked on federal aid that they may become even more reluctant to lend once it is gone.

The mortgage industry is particularly worried. It has been pressuring the government to extend an $8,000 tax credit for first-time homebuyers, fearing a recent increase in homes sales could prove fleeting without the tax break. The White House said Wednesday that it’s considering extending the tax credit, which is scheduled to expire in November.

“It’s the No. 1 question in the market: Can we wean ourselves off our addiction to cheap government-supplied credit?” says Mitch Stapley, chief fixed income officer at Fifth Third Asset Management in Grand Rapids, Mich.

If not, the nascent economic recovery could be cut short. Weak lending and borrowing would limit corporate and consumer spending, which accounts for 70 percent of economic activity.

The incentives are especially important these days, lenders say, because the habits of borrowers have changed.

In a sign that the recession and rising unemployment have made people leery about taking on more debt, the national savings rate was 4.2 percent in July. It dipped to a low of 0.8 percent in April 2008.

Big banks are not risk averse. Rather, their reluctance to lend reflects the fact that they must conserve cash to absorb billions in losses still expected to occur from bad loans that were made before the crisis. FDIC-insured banks cumulatively lost $3.7 billion in the second quarter, dragged down by growing numbers of bad loans. These banks set aside nearly $67 billion in the quarter in anticipation of future losses from soured loans.

Another factor sapping their appetite for lending is their diminished ability to pool loans into securities for sale to investors, a process known as securitization. This secondary market allows banks to reap fees when they sell the securities, as well as get cash to make more loans.

At its zenith, the securitization market funded $9 trillion in loans. The collapse of Lehman Brothers led panicked investors to pull their money out of the marketplace virtually overnight, wrecking the securitization business.

“The assembly line for loans is broken,” says Whalen of Institutional Risk Analytics.

Federal Reserve Chairman Ben Bernanke predicted this week the market “will come back” but probably not at the size it was.

For consumers, that’s made qualifying for credit a challenge.

Germaine Code, of Grand Rapids, Mich., was turned down last month for a mortgage on a $135,000, three-bedroom home because of delinquencies dating back more than 10 years that he says should have been removed from his credit history.

“The bank said my credit score was good but that I needed to get those (delinquencies) taken off and that my wife needed more time in her job,” says Code, who was able to get a lease-to-own option on the house.

During the boom years, homebuyers needed a credit score of 660 or above to qualify for the cheapest interest rates, says Greg McBride, senior financial analyst at BankRate.com. Today, they need a score of 740 or above.

Home lenders are also demanding proof of income and downpayments of at least 20 percent. Before the bust, first-time homebuyers often got mortgages with no money down and without proving they could afford payments.

The tough climate has forced many would-be borrowers to give up.

Consumers ratcheted back borrowing by $21.6 billion from June to July, the biggest drop since the Federal Reserve began keeping records in 1943. That left consumer debt at $2.47 trillion – slightly less than where it stood at the height of the crisis.

“Lots of people are fearful for their jobs. Even if you have good income, you’re probably cutting back on borrowing,” says longtime banking analyst Bert Ely.

The drop in borrowing could slow the economy’s recovery. That’s why it’s critical for the government to continue stimulating lending, especially in the crucial housing market, says David Olson, president of Access Mortgage Research & Consulting.

“If they cut back it would be catastrophic,” Olson says. “We could have a second downturn.”

Source: The Associated Press