June 21, 2012 1:04 am

Low rates not reaching many US homeowners

Most US homeowners are paying above-market mortgage rates, new data show, indicating that government efforts to spur refinancings have yet to fully benefit households despite ultra-low headline borrowing costs.

“Many Americans are able to take advantage of lower interest rates. Many people have refinanced or bought homes,” Ben Bernanke, Federal Reserve chairman, said on Wednesday at a news conference. But he added: “Mortgage access is much tighter than it’s been in a long time.”

The average rate on a new 30-year fixed-rate home loan is 3.71 per cent, according to Freddie Mac, the government-controlled mortgage financier, spurring millions of Americans to lock in record low rates.

But figures from CoreLogic, a housing data provider, show 20.5m of 39m creditworthy “prime” borrowers are paying rates of more than 5 per cent while just 5.7m households are enjoying rates of less than 4 per cent.

The data speak of a credit divide that the Fed and the Obama administration have struggled to close despite numerous schemes to enable borrowers to refinance into cheaper mortgages. That gap is having an impact on consumer spending, which makes up roughly 70 per cent of US economic activity, as a greater share of borrowers’ cash than necessary is being spent on housing.

The impact is also being felt in the White House, where Barack Obama faces a November election, and has recently pushed Congress to pass new legislation designed to further increase mortgage refinancings.

Experts argue that borrowers generally should be refinancing when their mortgage rates are at least 1 per cent higher than the market rate for a new home loan. In theory, more than 20m borrowers should be refinancing.

But many of these borrowers are “trapped”, according to Senator Robert Menendez, who has introduced legislation to ease access to refinancings for borrowers for whom the fall in house prices have left them with insufficient equity to refinance.

Current government programmes were supposed to deal with the issue. The Home Affordable Refinance Programme (Harp) helps borrowers with little to no equity refinance into cheaper loans. But the 1.2m borrowers that have taken advantage is lower than expectations.

Refinancings at Freddie Mac and sister company Fannie Mae fell from 4.2m in 2009 to 3.2m last year, data show, despite falling interest rates. Refinancings ticked up in the first quarter of this year, but not enough to stop the Obama administration from exploring further ways to boost refinancings.

Banks and government officials blame a range of barriers – from inadequacies at lenders to borrower inertia. Harp data indicate that Wells Fargo and JPMorgan Chase have achieved more financings through the programme than Bank of America.

But bankers privately say that the bulk of homeowners ignore offers to refinance. Doug Duncan, chief economist at Fannie Mae, the government-backed mortgage company, said in many cases the “lethargy” of homeowners could be explained by worries about losing their jobs and not wanting to incur upfront refinancing fees even if they resulted in lower monthly payments.

Investors in home loan bonds are betting that more refinancings will be slow to come and households will continue to pay above-market rates, according to data from Tradeweb, the bond trading platform.

Prices for mortgage bonds whose underlying loans range from 5 to 6 per cent and are backed by Fannie Mae or Freddie Mac have risen over the past year despite the overhaul of the Harp programme, signalling that bond investors are not concerned about increased refinancings.

If investors feared higher levels of refinancings, prices would have fallen for high-coupon mortgage bonds in which the borrower is paying above-market rates. Instead, prices for debt representing mortgages whose borrowers are paying 5 per cent have shot up dramatically, rising by more than 3 cents on the dollar for Fannie Mae and Freddie Mac 30-year bonds, according to Tradeweb data.

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