Tough remedies stay on shelf amid refinancing fever
Homeowners deluged mortgage brokers with calls Wednesday, hoping to take advantage of sharply lower interest rates to refinance into cheaper loans.
Countrywide Financial Corp., the nation’s biggest mortgage lender, said call volume jumped by at least 50% over last week. Independent brokers such as John West of Orange County also said their phones didn’t stop ringing.
“In 20 years in the business, I have never seen rates fall this far this fast,” West said. “I think lenders are really going to have to gear up. None of us were ready for this.”
The frenzy was triggered by the Federal Reserve’s surprise decision a day earlier to slash its benchmark lending rate to 3.5% from 4.25%. That pushed rates on some 30-year, fixed-rate loans to as low as 5.125%, down from 5.5% last week and from 6.3% a year ago.
Including the add-on fees known as points, West said a homeowner with a $400,000 loan at 6.5% could easily cut that rate by a full percentage point. That would trim the monthly payment on a 30-year loan from $2,528 to $2,271 -- a savings of $257.
Not everyone will benefit from the Fed’s action, however. Rates on fixed-rate “jumbo” loans (those exceeding $417,000) have barely budged from about 6.5%.
Moreover, an appraisal must confirm that borrowers have at least 20% equity in their home after the refinance -- a requirement that will exclude many struggling homeowners who have seen their properties decline in value.
Still, for people such as Shari De Cambra of Chino Hills, the rate cut provided the opportunity to trade the uncertainty of an adjustable-rate loan for the security of a mortgage with a fixed rate of 5.25% for 30 years.
“I don’t want to ever do it again,” De Cambra, who teaches math at Diamond Bar High School, said of her second refinancing. “Every time it costs you money.”
The beneficiaries of the rate cut also include mortgage lenders themselves, who have been battered by the housing slump and by rising defaults, especially on 100% financing deals and sub-prime loans to borrowers with feeble credit.
Neil Gitnick, president of Value Home Loan in Woodland Hills, said that his business had doubled from year-earlier levels in recent weeks, after previous mortgage rate declines, and that he recently hired four loan officers and a loan processor, boosting his staff to 25.
“We are using this market to grow,” said Greg Nierenberg, the company’s branch manager. “We are hiring new loan officers on a regular basis. We are recruiting.”
Business was also up at Countrywide, which agreed to a $4-billion takeover by Bank of America Corp. this month after posting a $1.2-billion loss for its most recent quarter.
The volume of incoming calls jumped 50% Tuesday above a week earlier “and all indications are that today we are even busier,” Dave Doyle, the head of Countrywide’s call centers, said Wednesday.
He said the only time he could recall that rivaled it was in June 2003, when interest rates bottomed out after a series of rate cuts following the Sept. 11 terrorist attacks.
Countrywide staffers also were busy making sales calls to customers, trying to persuade them to refinance billions of dollars in tricky nontraditional loans into plain mortgages the company could sell.
“This may signal a return to simpler times for mortgage lending,” Doyle said. “The transactions we are helping with are refinancings to lower the payment and switching adjustable rates to fixed. It’s also a good time to reduce the term of the loan -- some people can drop from a 30-year mortgage to a 25-year or 20-year loan and see their payments stay about the same.”
Doyle acknowledged, however, that the loan agents could offer little help to people with jumbo loans. That’s because the government-sponsored loan investors known as Fannie Mae and Freddie Mac won’t buy loans above $417,000. The limit in Hawaii and Alaska, which are classified as high-cost states, is $625,500. The mortgage industry is lobbying for an increase for California and other expensive states.
The difference can be significant. A borrower with good credit might pay 6.75%, including fees, for a jumbo loan of $600,000, said Pete Ogilvie of First Residential Mortgage in Santa Cruz, president of the California Assn. of Mortgage Brokers.
The monthly payment would be $3,892. But if that same borrower could get a loan at a so-called conforming rate of 5.75% (including points) the monthly payment would be $3,501, almost $400 less, Ogilvie said.
Mortgage brokers also say they can’t do much to help people who are “upside down” on their homes -- that is, who owe more on their property than it is worth.
Broker Elizabeth Jakubek of Legacy Home Loans in Mission Viejo said one of her customers had taken out two loans totaling $735,000 a couple of years back on a home that had been appraised at $825,000.
With the decline in home values, the house is now worth no more than $750,000 -- meaning that the client would need a jumbo loan covering all or nearly all the value of the property.
“And no one is going to give you 100% financing on a jumbo mortgage these days,” Jakubek said.
The unexpectedly large Fed rate cut followed brutal declines in stock markets around the globe. It was designed to complement a plan being crafted by President Bush and Congress aimed at getting Americans back in the malls by delivering $150 billion in tax breaks and other benefits.
Lower mortgage rates should also help the economy in several ways. For some borrowers at risk of foreclosure, lower payments may be just what they need to be able to afford a loan.
Beyond that, people who can refinance into loans with lower payments will have more spending power for consumer items. And payments on home-equity loans will also decline, freeing up additional money.
When she refinanced her Chino Hills home this week, De Cambra decided to “cash out” $5,000 of her accumulated equity. She and her husband, Henry, will use the money to buy carpet, bathroom tile and perhaps a wide-screen television -- exactly the kind of consumer spending the Federal Reserve sought to trigger.
About half the borrowers calling Value Home Loan want to boost their loan amounts to take cash out for remodeling or other spending, Nierenberg said. But few of them have the equity to do that, he said.
Jay Campbell is just the type of borrower brokers want to see. The 49-year-old owner of Campbell Engineering in Lake Forest has a $290,000 loan and plenty of equity. On Tuesday night, he locked in a 15-year loan at a 5% rate.
Unlike De Cambra, Campbell had no interest in getting more cash out of his home. He says he and his wife have paid off their cars and other debt. He considered the refinancing an opportunity to cut his interest rate to 5%, down from 6%, and shorten his loan term.
“I have been thinking about retirement and how I can better my position,” Campbell said. “This will cost us a little more each month, but it will allow me to pay off my mortgage right before I want to retire.”
The Federal Reserve is expected to cut its benchmark lending rate again next week, but when the stock market recovered a bit Wednesday -- an indicator that the market sees hope that the current rate cuts will help restore the nation’s economic health -- Treasury rates rose. And loan rates are tied to 10-year Treasury bond yields, so they rose too.
West, the Orange County broker, said although rates dropped sharply after the Fed action Tuesday, they ticked up again Wednesday afternoon.
“I’ve never seen anything like this volatility before,” he said.
The moral for borrowers: If you’re offered a good rate, lock it in and get it in writing, West said. If rates drop further, you can cancel your deal or ask the lender to give you a “float down,” he said. But if rates rise and you haven’t locked in, you lose.
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kathy.kristof@latimes.com
