Friday, December 26, 2008

As disappointing economic news continues to pour out of various government agencies, mortgage rates have remained low since their abrupt plunge a few days before Thanksgiving.

Last week, Freddie Mac, one of the two large government-sponsored agencies that purchase mortgage loans from banks, reported that 30-year fixed-rate mortgages hit a 37-year low. For the mortgage brokers who have been able to stay in business, suddenly the sound in their offices went from crickets chirping to phones ringing.

While it seems probable that rates could stay low throughout much of 2009, the mortgage landscape is far different from any other refinance boom that I have experienced in my 20-plus years in this business. Changes in this landscape are likely to mute the refinance boom that has just started. Consider the following:

The easy mortgage money that caused this mess is gone. Many homeowners who helped create the last three of four refinance booms were folks who applied for stated income and “no doc” loans because they couldn’t document enough income to qualify for traditional “full doc” loans.

Property values are down. Many homeowners who have good credit and solid income cannot take advantage of these historic rates because they have insufficient equity in the property.

In response to the mortgage meltdown, and to prevent from it happening again, mortgage giants Freddie Mac and Fannie Mae have implemented “risk-based-pricing.” If a homeowner doesn’t have excellent credit and plenty of equity in the property, he or she will be ineligible for the lowest available interest rates.

For example, I see from today’s rate sheet that a homeowner with 40 percent equity and an excellent credit score of 740 would receive a quote of 5.125 percent with no points or origination fees for a 30-year fixed-rate mortgage. A borrower with a credit score of 670 who has 20 percent equity would receive the same rate but would be charged two points. On a $300,000 loan, this makes the 5.25 percent rate $6,000 more expensive. If the homeowner with the lower credit score wanted to pay zero points, the rate would be well north of 6 percent.

Don’t misunderstand me. I’ve been busier than a one-armed wallpaper hanger since Thanksgiving. There are plenty of homeowners who still have great credit, good jobs and plenty of equity.

As I mentioned in my last column, the tighter rules, coupled with risk-based mortgage rates, reward responsible borrowers who have good credit and mortgage balances that are affordable in relation to their income.

However, the folks with excellent credit and good jobs who (unfortunately) purchased a house at the peak cannot - at this time - take advantage of these great rates. The federal government is taking extraordinary steps to pull our economy out of a very dangerous spiral south.

I have a suggestion. We certainly don’t want to bring back the subprime mortgage market and lend money to folks who clearly are not ready for the responsibility. However, it seems to me that homeowners who have excellent credit and verifiable income who got caught in the real estate slump should have the opportunity to refinance and lower their interest rates. The mortgage would be more affordable and the money saved would stimulate the economy. Unfortunately, a depressed appraised value makes these folks ineligible.

It seems to me that appraisals should not be required for folks who have excellent credit and income and wish to refinance to lower their interest rate. Sounds crazy? I don’t think so. Certainly no crazier than spending billions bailing out financial giants in New York and auto giants in Detroit. Is anyone listening?

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at

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