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Lower rates, fewer loans

By Polyana da Costa ·
Friday, September 23, 2011
Posted: 2 pm ET

Lower interest rates were not enough to spur home sales and refinances last year, shows a study by the Federal Reserve.

Even though mortgage rates in 2010 were significantly lower than in 2009, lenders originated about one million fewer mortgages last year than they did in 2009, according a report released Thursday. Mortgage loan originations declined about 12 percent, to about 7.9 million loans.

"Most significant, was the decline in the number of refinance loans despite historically low baseline mortgage interest rates," reads the annual report, which analyzed data from 7,900 lenders.

From the report:

"The interest rate environment in both 2009 and 2010 was generally quite favorable for well-qualified borrowers who sought to refinance, particularly in the second half of 2010, when the rate on 30-year fixed-rate mortgages fell to record lows. Nonetheless, compared with 2009, the number of reported refinancings was down about 14 percent."

OK, so the Fed knows rates already are low. The Fed knows the low rates have not helped solved our housing mess. And just this week, the Fed offered this solution to the economic crisis: a plan to reduce interest rates, also known as Operation Twist. Under the plan the Fed will sell short-term securities and reinvest $400 billion in long-term securities. The Fed also will continue to reinvest in mortgage-backed securities to help keep rates low.

But rates are not the problem! How can they be the solution?

The Fed knows where the real problem lies. But there's not much else the Fed can do.

If lending standards weren't so stringent and homeowners didn't owe more on their homes than their houses are worth -- or if owners could refinance their mortgages despite the lack of equity -- about 2.3 million more homeowners would have refinanced their mortgage in 2010, the Fed's study shows.

From the report:

"We estimate that, in the absence of home equity problems and underwriting changes, roughly 2.3 million first-lien owner-occupant refinance loans would have been made during 2010 on top of the 4.5 million such loans that were actually originated."

The inability to refinance is especially a problem in states that were hardest hit by foreclosures, where home prices have declined the most, the report shows.

In Arizona, California, Florida, Michigan and Nevada, 6.4 percent of borrowers with credit scores between 680 and 719 were able to refinance in 2010. In other states, 9.7 percent of borrowers within the same score range refinanced.

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1 Comment
September 26, 2011 at 8:21 pm

Why are interest rates now?