Many homeowners are unable to take advantage of lower interest rates. Above,… (Patrick T. Fallon / Bloomberg…)
U.S. interest rates are at rock-bottom levels, but that's not helping most Americans with mortgages. And those high-cost loans remain a big drag on the economy, experts say.
Roughly 69% of American homeowners with mortgages at the end of the second quarter had rates of 5% or higher and about 33% of them had rates above 6%, according to detailed mortgage data provided to The Times by Santa Ana research firm CoreLogic.
Meanwhile, the average 30-year fixed-rate mortgage has been below 4% every week but one this year, and the average 15-year fixed-rate mortgage, popular among buyers looking to refinance, has been below 3% since the last week in May, according to Freddie Mac.
Several factors may be keeping homeowners from securing lower mortgage rates, economists said, including battered credit, insufficient income, stricter lending standards and the costs of refinancing.
But a major aftershock from the housing crisis itself also remains a big stumbling block: the significant chunk of homeowners who are underwater and unable to get new loans.
For underwater borrowers — those who owe more than their homes would bring if sold — the CoreLogic data showed that 84% had loans with interest rates above 5%. Half of underwater borrowers had interest rates above 6% at the end of the second quarter.
Economists and policymakers see a big opportunity, arguing that getting borrowers into lower-cost loans would be an effective way of stimulating the economy — freeing up some income for those who are probably struggling the most to pay their mortgages. Refinancing could also help underwater borrowers by allowing them to plow more cash back into their homes and reduce principal.
To that end, the Federal Reserve last week unveiled big new steps to further push down mortgage interest rates and spur the housing market.
Under the Fed's stimulus plan, the central bank will buy $40 billion a month in mortgage-backed securities, with Chairman Ben S. Bernanke saying the intent is to "increase downward pressure on interest rates," particularly mortgage rates, which should encourage more home sales and refinancing.
But economists said those actions are likely to be limited as long as low rates remain out of reach for many homeowners.
"The constraint that is keeping people out of the housing market is absence of equity," said Richard Green, director of the USC Lusk Center for Real Estate.
"The drop in house prices means that many borrowers are underwater on their houses," he said, "and high unemployment has prevented potential first-time buyers from accumulating down payments."
The vast majority of borrowers with negative equity, about 84.9%, continued to pay their mortgages in the second quarter, CoreLogic reported last week.
Nevertheless, underwater loans remain an obstinate barrier to economic growth because people who remain stuck in their homes are often unable to pursue new jobs and other opportunities elsewhere. These borrowers are also higher risks for foreclosure.
Helping spur mass refinancing with new government policies would not only help underwater households but also get the economy moving again, economists say.
"It has very strong macroeconomic effects," said Joseph E. Stiglitz, a Nobel Prize-winning economist and professor at Columbia University. "The irony is the people who need the help the most have not been helped — the people who are underwater."
Changes this year to the Home Affordable Refinance Program for underwater borrowers with Fannie Mae and Freddie Mac loans have led to a 95% increase in participation in the program through the first half of the year.
Stiglitz is supporting legislation by Sen. Jeff Merkley (D-Ore.) that would expand refinancing to borrowers who have privately owned mortgages.
Other Senate bills also aimed at expanding refinancing opportunities and reducing costs are being sponsored by Sens. Dianne Feinstein (D-Calif.), Barbara Boxer (D-Calif.) and Robert Menendez (D-N.J.).
These bills are a priority for the Obama administration, but it's not clear whether the legislation will go anywhere in a divided Congress less than two months before the presidential election.
Although refinancing may be out of reach for many borrowers, the big banks are making big profits from refinancing the mortgages of those who do qualify.
The mortgage industry consolidated after the housing bust, and the banks left standing are charging higher interest rates than possible if the market were more competitive, given how low borrowing costs for banks are, experts said.
"The new reality in the mortgage market is that not only is there more demand for mortgages out there, but also the new reality is that lenders are making at least half, if not a third of the mortgages they made during the mortgage boom," said Guy Cecala, publisher of Inside Mortgage Finance. "They need to make more money on each loan."