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MORTGAGE RATES

Record Low Mortgage Rates Don’t Help Home Sales

Written By:
July 07, 2010 at 4:59 PM

Pending home sales fell by 30 percent in May despite Mortgage Interest Rates that are at record lows.

End of Taxpayer Credit Blamed

A survey by the National Association of Realtors found that the number of pending home sales was 15.9 percent lower than it was in May 2009, CNN Money reported. Home sales dropped so sharply because of the end of the $8,000 taxpayer credit the federal government offered new homebuyers.

The end of the tax credit is not the only reason why homes are not selling. Unemployment and underemployment have taken many people out of the housing market. Many others are staying away because of worries about job security and property values.

The collapse in property values brought on by the foreclosure crisis is also blamed for the slump in home sales. Some owners are unable to sell their homes or take out a new mortgage because the equity in their homes exceeds the home’s value.

Mortgage Activity Falling Too

Housing isn’t the only market suffering, the mortgage business is facing a similar catastrophic slump. Despite mortgage rates that are at record lows, mortgage-lending activity is 30 percent lower than it was in 2005 and half what it was in early 2009, the Associated Press reported.

Not even the lowest mortgage rates since the 1950s could jumpstart the mortgage market. The recent rate of 4.58 percent on a 30-year mortgage is the lowest level of mortgage interest reported since Freddie Mac started keeping track of it in 1971. Other observers believe the last time the rates were this low was in the 1950s.

Mortgages & Housing Sales Won’t Come Back Anytime Soon

Don’t expect an upswing in the mortgage or housing market anytime soon because interest rates have been under 5 percent for well over a year. Potential buyers who weren’t tempted by low interest rates last year won’t be motivated by them this year.

The only thing that was getting people to take out mortgages and buy homes was the tax credit. Now that it is gone many experts believe mortgage rates would have to fall to under 4 percent to induce people to start buying again. Given the continuing economic uncertainty not even that could be enough to get housing sales moving again.

Mortgage Refinance Up Slightly

The only bright spot in the mortgage industry has been a slight increase in the number of people looking to refinance existing mortgages. These homeowners are trying to take advantage of lower mortgage interest rates. Refinancing or converting an existing mortgage to one with a lower rate can save homeowners money.

Unfortunately some borrowers are having a harder time refinancing their mortgages because of the fall in property values. Many homeowners can’t get refinancing because the amount of their mortgages exceeds the amount of equity they have in their homes.

The equity is the difference between a home’s value and the amount it is mortgaged for. When the amount of the mortgage exceeds the home’s value, the home is “underwater;” and the homeowner can’t borrow anymore. It is now estimated that up to 25 percent of American homeowners are now in this situation.

Massachusetts Underwrites Mortgages for First Time Homebuyers

At least one state government is taking matters into its own hands by trying to jump start home sales with a new mortgage program.

The Massachusetts Housing Partnership is offering first time homebuyers what it calls a “Soft Second Loan Program.” Under this arrangement, lower and middle-income families take out two mortgages to cover the cost of home purchase.

Here’s how the “Soft Second Loan Program” works:

  • The homeowner takes out a traditional 30-year fixed rate mortgage that covers 77 percent of the cost of the home.
  • The state subsidizes a second “soft” mortgage that covers 20 percent of the purchase price. This second soft mortgage serves as the down payment for the house.
  • The borrower only has to make the interest payments on the second mortgage for the first 10 years of the arrangement. Payments on the mortgage principal begin after 10 years.
  • The state will subsidize up to 75 percent of the interest payments for the first 10 years for qualifying individuals.

Only borrowers who meet certain guidelines will be able to qualify for this program.

Soft Second Loan Program Guidelines

  • The homebuyer’s income must not exceed the average income in the community. This would be about $100,000 for a married couple in Boston.
  • Borrowers must be first time homebuyers who intend to live in the home.
  • Those who qualify for the program will have to complete a homebuyer education program and a home safety course within one year of home purchase.
  • Homebuyers who sell homes purchased under the program in the first few years will have to repay any interest subsidies they have received.

This arrangement sounds a lot like the zero-down mortgages that were popular a few years back. Those mortgages allowed many people to buy homes they couldn’t afford and helped cause the foreclosure crisis. It is unlikely that Massachusetts will be able to avoid a similar debacle with this program.

The biggest question I have about this program is how the state is going to finance it. Banks that are reeling from the financial crisis and facing stiffer federal regulations will probably not be willing to participate in such a scheme. Traditional mortgage lenders who are tightening mortgage standards will also be leery of the Soft second mortgage program.

One possibility is that the state could use tax revenues to underwrite these mortgages. If that’s the case it won’t be very popular with taxpayers and those responsible for it would probably face a nasty political backlash.

Expect to see more programs like this offered around the country under the guise of stimulus as the housing situation worsens. The only thing that will limit the spread of such state sponsored sub-prime lending schemes will be the budget woes affecting most state governments.

Tax Credit Deadline Brings Out Scam Artists

A number of scam artists tried to take advantage of the $8,000 federal tax credit for new homebuyers even though they missed the April 30 cut off date.

To get their $8,000 homebuyers had to sign a contract for a house by April 30 and close on it by June 30. It appears that an unknown number of homebuyers who signed contracts after April 30, put the date April 30 on the required documents in an attempt to get the tax credit.

It isn’t known how much of this fraud has occurred because the IRS hasn’t made any statements about this issue. The Inspector General of the US Treasury Department released a report that detailed quite a few other frauds involving the tax credit in June.

Expect to see news reports saying that a lot of this fraud occurred in the near future. The Inspector General found that the tax credit program was the victim of all sorts of scams including one in which convicts in prison were able to claim the tax credit.

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