Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, August 29, 1993 TAG: 9308290088
SECTION: NATIONAL/INTERNATIONAL PAGE: C-2 EDITION: METRO
SOURCE: The Washington Post
DATELINE: WASHINGTON LENGTH: Long
With 30-year mortgage rates averaging less than 7 percent, 15-year mortgages available for just over 6 percent and variable rate loans under 4.5 percent, mortgage lenders say they are handling four times as many refinancings as last year and 12 times as much business as they did just three years ago.
So many homeowners are refinancing their mortgages that the lenders, appraisers and settlement companies can't keep up with them, said Washington real estate lawyer Benny L. Kass. "We are having serious problems," he said. "The lenders are promising too much and they just don't have the staff to do it."
"It's brutal," acknowledges Pat Casey, regional vice president for Crestar Mortgage, one of the biggest lenders in the Washington area. To keep up with the demand, Crestar has added new automated computer and phone systems, streamlined its mortgage application process and farmed out work to processing firms.
Refinancing volume shows no sign of slowing, he added, because the continuing drop in rates means more and more borrowers fall under the usual rule of thumb: If you can reduce your interest rate by 2 percentage points; if you plan to stay in your house for three years; and if your refinancing costs will amount to less then 3 percent of the loan, you'll come out ahead.
Millions of American homeowners have never seen mortgage rates this low, said David Berson, chief economist for the Federal National Mortgage Association, known as Fannie Mae.
The last time rates were this low was the summer of 1968, he said, when the Rolling Stones had just come out with "Jumping Jack Flash" and college students were flocking to Chicago to protest against the Vietnam War at the Democratic National Convention. Today, the children of the '60s are refinancing their mortgages, often trading their 30-year loan for a 15-year note so that they can pay off their home loans before they retire.
Economists say low inflation, sluggish economic growth and efforts by Congress and the Clinton administration to reduce the federal budget deficit are the main reasons interest rates have come down. Those factors are likely to keep interest rates on mortgages and bonds low for the next few months, and could push them still lower.
"We could continue to see bond yields and mortgage yields edging down," said David Lereah, economist for the Mortgage Bankers Association, the Washington-based trade association for the home lending industry.
"I don't think the bottom has been reached on rates," said John A. Tuccillo, chief economist for the National Association of Realtors. "We could see another quarter of a [percentage] point knocked off the 30-year mortgage."
Low rates were the main reason why sales of existing homes last month were up almost 15 percent from the same month a year ago, he added, and real estate agents expect rates to remain attractive enough to stimulate home sales and refinancings for the next several months.
In the last week, average rates on 30-year loans plunged a quarter of a percentage point to 6.97 percent - down from just over 8 percent a year earlier and from 10 percent three years ago, said Robert Van Order, chief economist for the Federal Home Loan Mortgage Corp., known as Freddie Mac.
That's an unusually large decline in a single week, he said, and it contributes to economists' conviction that rates are not about to rebound anytime soon. "I would guess that rates will go up to 7.25 percent to 7.5 percent next year, but that's not a big increase," said Van Order.
Van Order's company and its sister firm, Fannie Mae, were chartered by Congress to provide funds for mortgages and are the two biggest sources of mortgage money today. They are limited by law to making individual loans of not more than $203,150.
Fannie Mae and Freddie Mac get money for mortgages by selling bonds to investors, and those investors are not pleased by the drop in rates and the rush to refinance, Van Order said.
On a $100,000 mortgage, today's sub-7 percent rates translate into monthly payments about $80 lower than on the 8-plus percent rates prevailing a year ago. And if you refinanced a 10 percent $100,000 mortgage, you can save more than $200 a month.
Homeowners who have refinanced in the past two years are saving $9 billion in interest, estimates Lereah of the Mortgage Bankers Association. Homeowners with adjustable-rate mortgages get the benefit of lower rates without refinancing, and their payments have dropped by more than $18 billion in the past two years.
Many people who do cut their payments are saving the difference, but some of them clearly are spending it. Economists believe that's one of the reasons consumer spending remains relatively strong and why new-car sales are growing steadily.
After all, a $200-a-month cut in the mortgage payment is enough to buy a car - because car loan rates also have come down to the lowest level in 20 years.
by CNB