U.S. home loan refinancing surges as rates plunge

Posted on February 13 By MLP Blog

Mar. 7- It's scary to think that your retirement or the kids' college fund can be hurt by a mortgage company lending money to somebody who, it turns out, can't afford the payments.

But that can happen in today's economy, where overzealous sub-prime lenders can trigger foreclosures, worsen the slumping housing market, discourage consumers, cause an economic slowdown and roil the stock market.

That spiraling scenario hasn't happened yet, exactly, but you know how these things go: One day there's negative news about sub-prime lender New Century Financial, which took place this week, and the next minute your mutual funds are going backward.

"Things are connected," said Jason Henderson, a Federal Reserve economist in Omaha, meaning that problems with sub-prime lending - loans to people with poor credit scores - can have broader consequences on the financial markets and the economy as a whole.

One Omaha mortgage broker estimates that as many as 25 percent of the home loans in the metro area are to borrowers with below-standard credit ratings. A senior economist with Wells Fargo & Co., however, says the sub-prime flu isn't contagious and your mutual fund is safe.

"We think the troubles are going to remain contained in the sub-prime market, pretty much," said Scott Anderson of Minneapolis. "It's not a major problem overall for the financial system. Banks are in real good financial shape."

Concerns about sub-prime lending, including testimony in Congress last week by Federal Reserve Chairman Ben Bernanke, have made investors nervous and contributed to last week's 416-point drop in the Dow Jones industrial average.

Many of the sub-prime loans in question are "2/28″ mortgages, which charge low rates for the first two years and then adjust upward.

Many sub-prime borrowers intend to refinance at lower interest rates after two years. But if that doesn't happen, they end up with rates of 13 percent or more, raising monthly payments sharply.

"No one wants a $300 increase in their monthly payment," said Dave Ulferts, vice president for mortgages at First National Bank of Omaha, which does not make sub-prime loans.

"We see customers come in all the time who can't refinance because of their credit problems," Ulferts said. "They're stuck with a mortgage loan they can't afford."

For many, there's no way out except to try to sell their home and hope for a price that pays off the mortgage. That puts another house on the market, and, if it sells, absorbs another home buyer.

Tate Fitzgerald, executive vice president for Bank of the West's mortgage operation, said lenders are generally tightening their credit standards, even if they handle only standard loans.

"We're actually optimistic about the marketplace and what we can offer," he said. "But I am concerned as I look and see what the fallout will be in the market. Having fewer lenders - that's going to change the landscape of the mortgage lending industry."

Omaha mortgage broker Bruce McClatchey of First Independent Residential Mortgage estimated that as many as 25 percent of Omaha's home mortgages are sub-prime.

"In some respects, there's been loans made that shouldn't have been made," he said.

He said 2/28 loans are intended to let a person improve his or her credit rating and refinance with a standard loan before the sub-prime loan rates increase. But refinancing is difficult now because interest rates are up and it's harder to qualify for credit .

"There will be people taken out of the market," McClatchey said. "Probably people that shouldn't have been in the market in the first place. This is almost, maybe, a needed correction."

Anderson, the Wells Fargo economist, said there's no evidence the sub-prime loan problems would create the sort of credit shortage that has preceded past recessions. Banks have plenty of money to lend to credit-worthy borrowers, he said.

While sub-prime delinquencies are up sharply, the total delinquency rate is at an all-time low, he said. And delinquent sub-prime mortgages amount to only 2.8 percent of all mortgages, he said.

"We're still talking about a relatively small part of the overall mortgage business," he said, and such a tiny piece of the entire U.S. economy that it's nearly insignificant.

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