57% of customers unable to refi according to survey

[c1ue]

Some 57 percent of mortgage broker customers were unable to refinance their adjustable-rate loans to avoid higher monthly payments in August, suggesting the U.S. housing slump may worsen, according to a national survey on Tuesday.

http://www.reuters.com/article/marke...0070911?rpc=44

This is actually somewhat better than I thought.

I was expecting more in the 75 percentile unable to refi to keep rates steady.

[SeanO]

Re: 57% of customers unable to refi according to survey

http://www.reuters.com/article/marke...0070911?rpc=44

This is actually somewhat better than I thought.

I was expecting more in the 75 percentile unable to refi to keep rates steady.

Keep in mind that a significant portion of refis should be on loans prior to 2005, loans which by and large should have sufficient equity to refi. Take for example a 5/1 arm from 2002 - that should be a no-brainer to refi as there would still be plenty of equity.

So even if you expected all of the 05/06 refis to be turned down that should still only represent perhaps 20% of the total. As such I find 57% to be quite a bit worse than I would have estimated.

Sean

[c1ue]

Re: 57% of customers unable to refi according to survey

SeanO,

Good point.

It does bring up another question: I wonder if there are significant numbers of people trying to refi earlier than their reset date.

While loans in general seem harder to get, on the other hand it seems that interest rates are going down for the fixed loans but up for the variables.

This makes me wonder if the truly financially stable who took out ARMs might be jumping the gun to lock in fixed rates - which in turn could skew early results.

Note that this is only a 25 bp or so downtrend from the June peak. The numbers are still significantly up vs. the first 4.1 months of 2007.

http://www.freddiemac.com/dlink/html...MSOutputYr.jsp

September 6, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.46% 
6.15% 
6.32% 
5.74% 
Fees & Points:
0.5 
0.5 
0.6 
0.6 
August 30, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.45% 
6.12% 
6.35% 
5.84% 
Fees & Points:
0.5 
0.5 
0.6 
0.8 
August 23, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.52% 
6.18% 
6.34% 
5.60% 
Fees & Points:
0.4 
0.5 
0.6 
0.6 
August 16, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.62% 
6.30% 
6.35% 
5.67% 
Fees & Points:
0.4 
0.5 
0.5 
0.6 
August 9, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.59% 
6.25% 
6.33% 
5.65% 
Fees & Points:
0.4 
0.4 
0.5 
0.5 
August 2, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.68% 
6.32% 
6.29% 
5.59% 
Fees & Points:
0.3 
0.3 
0.5 
0.5 
July 26, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.69% 
6.37% 
6.30% 
5.69% 
Fees & Points:
0.4 
0.4 
0.4 
0.5 
July 19, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.73% 
6.38% 
6.35% 
5.72% 
Fees & Points:
0.4 
0.4 
0.5 
0.5 
July 12, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.73% 
6.39% 
6.35% 
5.71% 
Fees & Points:
0.4 
0.4 
0.5 
0.5 
July 5, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.63% 
6.30% 
6.29% 
5.71% 
Fees & Points:
0.4 
0.4 
0.4 
0.4 
June 28, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.67% 
6.34% 
6.30% 
5.65% 
Fees & Points:
0.4 
0.4 
0.5 
0.5 
June 21, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.69% 
6.37% 
6.31% 
5.66% 
Fees & Points:
0.5 
0.5 
0.6 
0.7 
June 14, 2007 
30-yr 
15-yr 
5/1-yr ARM 
1-yr ARM 
Average Rates:
6.74% 
6.43% 
6.37% 
5.75% 
Fees & Points:
0.4 
0.4 
0.5 
0.7 

[SeanO]

Re: 57% of customers unable to refi according to survey

SeanO,

Good point.

It does bring up another question: I wonder if there are significant numbers of people trying to refi earlier than their reset date.

While loans in general seem harder to get, on the other hand it seems that interest rates are going down for the fixed loans but up for the variables.

This makes me wonder if the truly financially stable who took out ARMs might be jumping the gun to lock in fixed rates - which in turn could skew early results.

Note that this is only a 25 bp or so downtrend from the June peak. The numbers are still significantly up vs. the first 4.1 months of 2007.

I've been gathering anecdotal evidence on this point for a while. In the CA Bay Area I run into a lot of folks with jumbo 5/1 interest only ARMs.

I actually had one myself which I refi'd to a fixed 30 when rates were in the mid 5's. My 5/1 was at 4.25% (interest only) and the payment difference to fixed 30 was big. With rates now in the mid 6's its worse.

As I've done my anecdotal survey, the majority of folks with the ability to take on higher payments have typically said something to the affect of "I should probably look into it, but I hate to give up this rate before I have to".

I imagine the Mortgage Bankers Association has some data on this point, but my gut is that folks aren't rushing to refi out of anything but the ARMs that are resetting soon.

Sean

[c1ue]

Re: 57% of customers unable to refi according to survey

As I've done my anecdotal survey, the majority of folks with the ability to take on higher payments have typically said something to the affect of "I should probably look into it, but I hate to give up this rate before I have to".

I would agree with this - I firmly believe only those who really know what they are doing will have switched over.

Everyone else is praying for salvation and that always turns out well...;)

Of course, I would also argue that going into a 5/1 ARM is almost certainly a financial error even with the idea of switching into a fixed rate later.

All of the interest you had paid up until the refi point is gone, ditto most of the fees, all you wind up with is a bit back via a backhand tax break. Thus unless you paid off a lot of principal, you almost assuredly were betting on 1) house price going up/stay even and 2) Your income increasing.

[SeanO]

Re: 57% of customers unable to refi according to survey

Of course, I would also argue that going into a 5/1 ARM is almost certainly a financial error even with the idea of switching into a fixed rate later.

I think they have their place. As I understand it they were originally introduced to help new doctors and lawyers who had high earning potential, but limited income during the first few years. Was really helpful for me in managing cash flow as I started a new company. I also saved $10k/yr in interest over the 3 years I had it, I have no complaints.

As with most of these loans, things went wrong when folks used them to "afford" property that they otherwise wouldn't be able to.

Sean

[c1ue]

Re: 57% of customers unable to refi according to survey

Sean,

Good point - the ARMs and what not are useful for cash flow purposes.

However, how much out of pocket did you actually save/spend?

If 80% of those 3 years of payments were interest, then you basically paid that interest for the purposes of preserving cash flow.

If I use a $500K loan as an example: 6% interest = $3000/month for a 30 year fixed. I can't find a decent ARM calculator, but I'll assume a 4% teaser rate = $2000 monthly payment.

3 years of the 6% loan = $108K of payments, of which around 10% is principal. You then have roughly $970K in payments left for the remaining 27 years of which $490K is principal.

3 years of ARM = $68K of payments - again assuming roughly 10% principal.

You refi into a 5.5% fixed 30 year, principal would be $493.5K plus $515K in interest = 1008K.

This isn't bad - roughly equal to the cash you saved especially if you disregard fees attached to the refi.

But you took on interest rate risk for the whole loan!

How much is an interest rate derivative for $500K for 3 years?