- The Washington Times - Friday, September 21, 2007

The credit crunch in residential real estate is likely to impact the overall economy. Property values skyrocketed during the first half of this decade, but real estate prices in most areas are flat or declining. As a result, homeowners are feeling “less wealthy.” Consumer spending is likely to slow, contributing to a slowing economy.

The slowdown in real estate activity is exacerbated by the credit crunch. Subprime loans and so-called Alt-A programs are much harder to find, and jumbo loan rates have shot up.

This isn’t a pretty economic picture. Financial pundits have started using the infamous “R” word: recession. Are we, indeed, heading into a recession?

I think it’s too early to tell, but signs of economic weakness have popped up in recent weeks. A weak economy usually leads to lower interest rates, including fixed-rate mortgages. In fact, the yield on the 10-year Treasury bond dropped more than 0.75 percent over the past three months — from about 5.3 percent to 4.5 percent. Fixed-rate mortgages tend to follow the 10-year T-bond.

Does this mean a refinancing wave is around the corner? The mortgage industry turmoil has kept interest rates from falling as much as the 10-year T-bond. And the lack of demand for jumbo loans on Wall Street has forced these rates up.

Here’s my take: While the subprime market may take a long time to recover, the shortage of “A” credit mortgage paper will be temporary. When the mortgage industry finishes its consolidation, rates will go back to following the movement of the 10-year T-bond.

If the economy continues to weaken, long-term interest rates will continue to fall.

Looking at a menu of conventional conforming mortgage programs, which allow for loan amounts up to $417,000, I see they have begun to fall. Here’s a sampling of interest rate quotes for a $300,000 refinancing loan:

m 6.25 percent for a 30-year fixed mortgage with no points or origination fees. The so-called zero-closing-cost refi would carry a rate of 6.5 percent.

m 6 percent for a 15-year fixed mortgage with no points. The zero-cost rate increases to 6.25 percent.

By contrast, jumbo rates are pushing 7.75 percent for a 30-year fixed mortgage with no points. The zero-cost rate is closer to 8 percent.

These rates may not appear to be low enough to create a refinancing wave, but folks who are carrying adjustable rates will soon be calling their local mortgage experts. When these rates come up for adjustment, the vast majority will pop up into the 7.75 percent range.

For folks with conforming loan amounts of less than $417,000, refinancing a 7.75 percent ARM to a 6.5 percent fixed-rate loan with no closing costs makes plenty of sense. Even jumbo loan holders might want to fix their ARMs, despite the higher rates.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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