Low loan costs drive round of refinancing

The phones are ringing off the hook again at home lenders’ offices, thanks to the lowest interest rates since the early 1960s. But analysts say it won’t do much to lift the depressed housing market.

That’s because most of the callers aren’t facing foreclosure or looking to buy a new house. They’re solid homeowners who have made payments on time and still have equity in their houses -- people who now hope to trade in their old mortgages for a fixed-rate home loan in the sub-5% range.

With the boom in refinancings, “it’s Christmas come early. The phones are going nuts. I’m here 15 hours a day,” said Jeff Lazerson, an independent mortgage broker in Laguna Niguel.

Lazerson said the large majority of the calls were from would-be refinancers he can help, with a few from first-time buyers looking for inexpensive homes. A few weeks ago, he was hearing mainly from troubled borrowers who owed more than their homes were worth. He couldn’t help them then -- and can’t help now.

The Federal Reserve’s reduction of a key short-term interest rate to near zero triggered some of the calls, although the Fed doesn’t directly influence long-term mortgages. Holders of home-equity lines of credit benefited, however, because interest on those loans is tied to short-term rates such as the prime rate, which dropped from 4% to 3.25%.

Demand to refinance home loans is so high that mortgage wholesalers -- lenders who make loans through independent brokers -- are caught in bottlenecks created by the flood of applications, said Fred Arnold, head of American Family Funding in Santa Clarita and president of the California Assn. of Mortgage Brokers.

“The people underwriting the loans have been hit hard. They’ve all downsized -- they’re staffed for what we were prepared for, not the boom,” Arnold said. “But it’s a welcome problem.”

The degree to which the surge is driven by refinancings was apparent in the Mortgage Bankers Assn.’s weekly survey of applications, released Wednesday.

The trade group said the volume of home-loan applications was 37% above year-earlier levels for the week ending Dec. 12. During that week, the average rate for 30-year fixed-rate loans fell to 5.18% from 5.44%, and it was lower still this week, according to HSH Associates and Bankrate.com.

Despite the lower rates, the number of applications for purchase loans decreased 4.5% from the previous week, while refinance applications rose 6.5%, the Mortgage Bankers Assn. survey found.

Refinancing current mortgages doesn’t address the foreclosure epidemic that has devastated areas such as the Central Valley, the Inland Empire and Las Vegas. Economist Edward E. Leamer, who heads UCLA’s economic forecasting unit, said rising unemployment had added such a burden to these beaten-down markets that the government should encourage banks to rent out the repossessed properties.

“We need to clear out all the foreclosures. Those places should be rental properties,” Leamer said. “There just aren’t enough qualified buyers.”

For people with credit scores of 720 or better and 20% equity or down payments, fixed interest rates on 30-year mortgages were averaging just over 5% this week for loans without the upfront charges known as points. Brokers were getting rates below 5% for solid borrowers willing to pay a point, or 1% of the loan balance.

These ultralow rates are for loans that can be bought or guaranteed by Fannie Mae and Freddie Mac, the mortgage giants that crashed, were bailed out and now are controlled by the government. Congress raised the maximum size of these “conforming” loans temporarily to $729,750, but the cap falls to $625,000 on mortgages funded after the first of the year in the nation’s priciest areas, including much of Southern California.

Though the low rates may make it easier for a few people to buy foreclosed properties, they won’t help the millions of borrowers who owe more than their home is worth or buyers in expensive areas such as coastal California. Very few lenders are even providing “jumbo” mortgages of more than $625,000, Lazerson said, and those who do are charging rates well into the 7% range for 30-year fixed-rate loans.

The dynamics have clearly shifted for mortgages of less than $625,000, however. Lenders expect the U.S. Treasury to buy mortgages and mortgage-backed bonds to force down rates, Arnold said.

And the Federal Reserve’s pledge on Nov. 26 to purchase $600 billion in mortgage bonds and direct debt from Fannie and Freddie is an implicit promise that the government-backed mortgage agencies will purchase the low-interest loans, said Tom Davidoff, a housing expert at the UC Berkeley business school.

In an announcement this week, the Fed strengthened its intent to buy vast quantities of mortgage debt and said it would cut its benchmark interest rate to as low as zero.

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scott.reckard@latimes.com