July 26, 2010 (FreeRateUpdate.com) – The last time mortgage rates were as low as they are today was in the mid- 1950s, although back then, a long term mortgage rate was 20 or 25 years, rather than today’s typical 30 year fixed rate. A decade ago, most experts would not have believed that rates would ever drop this low. But then a decade ago, experts never thought they would lack for customers as they do today.
Fast forward to 2005 – 2007, the peak of the housing boom. Rates were higher than today’s rates and buyers and refinancers were everywhere. Lending activity in the summer of 2005 was approximately 30% higher than today, despite homeowners and refinancers having to pay almost a full percentage point more than required today. But lending standards were lax. It was not difficult to get a loan, even for people who did not have much of a down payment or not not-so-great credit.
So what happened? The housing bust, that’s what. Millions of people have been slammed by the housing collapse leaving them with insufficient funds for a down payment, little or no home equity, lack of credit and/or steady income required to get or refinance a mortgage in today’s market.
Let’s start with the fact that lending standards were far too lax during the boom. Most experts did not believe that a housing bust would ever occur. But the housing bust did occur; dropping home values and depleting home equity for at least 25% of the American homeowner population. The result: many borrowers with good credit and solid jobs have been rejected when they try to refinance because their homes are worth less than what they owe on their mortgage.
We are in the middle of a financial crisis. Unemployment is high. People who bought during the housing boom with little down payment and not-so-great credit who have since lost their jobs or had to take a pay cut are now under water. Many are behind on their payments and many have had to foreclose on their homes. The result: Mortgage lending standards have made a 180 degree turn. People who do not have stellar credit don’t qualify. Neither do people who do not have stable jobs. And, many people lack the higher down payments now required to buy or the home equity required to refinance in today’s housing market. The fear of risk is climbing to a record high. Dropping home sales and dropping home values have resulted in home buyers and homeowners becoming cautious about borrowing and bankers becoming equally cautious about lending.
In addition to stricter lending policies, the tax credit that was helping to lift home sales ended a few months ago, on April 30, resulting in even fewer people trying to buy homes. Applications in June were down 30% from those in April.
Another issue is that for the past approximately two years, many people have been able to get mortgage rates under 5% at several points over. For homeowners falling into this category, rates would need to drop to 4% for it to be financially worthwhile for them to refinance. Having to spend thousands to refinance now would not save them money.
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