Mortgage rates plummet

Mortgage rates have fallen for the second week in a row, as oil prices plunged, too.

The benchmark 30-year, fixed-rate mortgage fell 11 basis points, to 5.59 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.4 discount and origination points. One year ago, the mortgage index was 6.48 percent; four weeks ago, it was 5.95 percent (the peak, so far, in 2009).

The benchmark 15-year, fixed-rate mortgage fell 14 basis points, to 4.93 percent. The benchmark 5/1 adjustable-rate mortgage fell 12 basis points, to 5.05 percent.

The decline in mortgage rates happened alongside a slump in the price of crude oil. Both interest rates and oil prices can be seen as indicators that the economy continues to stumble, like a drunk trying to find his way out of a dark, unfamiliar saloon.

Mortgage applications were up last week, according to the Mortgage Bankers Association. A big chunk of that increase came from homeowners applying to refinance -- trying to take advantage of possibly a final chance to refinance their mortgages.

Some of those would-be refinancers are trying to take advantage of the Obama administration's Making Home Affordable refinance plan, which is designed to help borrowers whose home values have fallen. Almost four months after the refi plan's guidelines were published, only about 50,000 homeowners have been able to take advantage of it.

There has been a slow implementation of the plan by Fannie Mae, Freddie Mac, mortgage servicers and mortgage insurance companies. In fact, home loans with mortgage insurance still aren't being refinanced under the Making Home Affordable program. Meanwhile, mortgage delinquencies and foreclosures continue to rise -- a problem that the Making Home Affordable program was designed to mitigate.

Few modified mortgages

Since the mortgage meltdown began in 2007, only 3 percent of seriously delinquent mortgages have been modified with reduced payments, according to a research paper published on the Web site of the Federal Reserve Bank of Boston.

Servicers are reluctant to modify mortgages because modification is an expensive, time-consuming process without a high probability of success, according to the paper. After the servicer spends all that time and money modifying the loan, there's roughly a 50-50 chance that the borrower will fall at least two months behind within a year.

Furthermore, servicers know that lots of borrowers catch up with their mortgage payments on their own, without help from the lender, according to the paper written by Manuel Adeline, an economics Ph.D. candidate at MIT; Kristopher Gerardi, a research economist for the Atlanta Fed; and Paul Willen, a senior economist for the Boston Fed.

Politicians and pundits like to say that lenders are reluctant to modify mortgages because the loans are securitized. But the Boston Fed paper rebuts that piece of conventional wisdom. About 3 percent of mortgages are modified, whether they're owned by the bank or by far-flung investors.

Future foreclosures?

That's not the story that servicers tell. They like to say that the last thing they want to do is foreclose on a house and go through the trouble of selling it. But the researchers point out, modifying loans can be seen as throwing good money after bad.

For one thing, almost one-third of seriously delinquent borrowers "self-cure" -- they catch up on their mortgage payments. "(I)f taken at face value, this means that, in expectation, 30 percent of the money spent on a given modification is wasted," the researchers say.

And many borrowers end up in foreclosure, anyway, after having a loan modified: "For them, the lender has simply postponed foreclosure; in a world with rapidly falling house prices, the lender will now recover even less in foreclosure."

If that makes you think mortgage servicers are ruthless, another research paper suggests that borrowers are ruthless, too. It estimates that 26 percent of today's mortgage defaults are "strategic" -- that is, the borrower can afford the monthly payments but is willing to go into foreclosure (or flirt with foreclosure and get a modification) anyway.

Why would a homeowner do that? Well, more than one-fifth of mortgage borrowers owe more than their homes are worth, say Luigi Guiso of the European University Institute, Paola Sapienza of Northwestern University, and Luigi Zingales of the University of Chicago in a paper titled "Moral and social constraints to strategic default on mortgages."

The researchers conclude that the deeper underwater a borrower is, the more likely the borrower is to "strategically default." In addition, if you know someone who has strategically defaulted, you're more likely to follow that ruthless example. "Our results suggest that these contagion effects should be seriously considered in public policy regarding housing," the researchers say.