(TheNicheReport) - The strict credit and qualification guidelines that mortgage underwriters are directed to enforce on behalf of their banks have crushed the hopes of many American homeowners in the last few years. Should this rigid lending environment continue, mortgage lenders could find themselves without any borrowers left to refinance.
Mortgage interest rates in the United States are currently at levels that were last seen when Dwight D. Eisenhower was President and Elvis Presley was just starting his recording career. The average Annual Percentage Rate (APR) on the benchmark 30-year fixed mortgage is just a few basis points above 3.5 percent, and the 15-year fixed home loan is actually under 3 percent. Borrowers seeking to refinance their existing mortgages are well-aware of these record low rates, but few are able to take advantage.
For major banks and small mortgage brokerages, refinancing is the only type of mortgage activity taking place in their offices. Mortgage interest rates have been steadily dropping since the global financial crisis hit its peak with the fall of Lehman Brother on Wall Street back in 2008. Loan originators have looked at millions of applications for refinancing since then, but only a fraction have made it to the closing table.
Lenders are now concerned that they may actually be running out of qualified applicants to refinance. According to a recent report from the Mortgage Bankers Association, the early days of July marked the third week in a row that refinance applications have fallen at banks and lending shops around the country. Considering the ultra-low rates, this drop in applications does not bode well for the market.
More Legislative Action Needed
The sharp dip in refinancing activity comes in the wake of two government initiatives to shore up the ailing American housing market. In an attempt to keep the national economy afloat, government-sponsored mortgage investors Fannie Mae and Freddie Mac made changes to the Home Affordable Refinance Program (HARP), a federal initiative to save troubled borrowers from foreclosure. The Federal Housing Administration (FHA) also pitched in by allowing a streamline refinance process for existing FHA mortgages.
The two initiatives effectively eased up on the underwriting criteria and attracted many applicants. In both cases, there was a sharp increase in nationwide refinance activity, although it was short-lived. Legislators in Congress have introduced bills that are similar in scope to the changes that Fannie, Freddie and the FHA implemented earlier this year, but on a long-term basis. These proposals are now in the hands of Congress, but more immediate relief may come sooner in the form of an initiative by the Obama administration that would direct the FHA to significantly ease up on its underwriting and allow more borrowers to take advantage of the current low rates.
