Mortgage rates hit record lows

This post comes from Marilyn Lewis at MSN Money.

The debt problems in Europe are credited with pushing mortgage interest rates down even further. New record lows were reported today in Freddie Mac's weekly survey of rates:

• 30-year fixed-rate mortgages this week had an average interest rate of 4.09% (with an average of 0.7 point paid). Last week, rates averaged 4.12%; last year at this time, the average was 4.37%.
• 15-year fixed-rate mortgages were at 3.3% on average this week (with 0.6 point paid). Last week, the average rate was 3.33%; a year ago this time, it was 3.82%.

Plenty of homeowners stand to benefit from refinancing. "Currently, more than 8 million Fannie or Freddie loans carry an interest rate of more than 6%," reports HousingWire.

Says Frank Nothaft, Freddie Mac's chief economist:

The average interest rate of mortgages outstanding in the second quarter was 5.28%. By refinancing into today's 30-year fixed mortgage, homeowners could shave almost $1,715 a year in interest payments on a $200,000 loan.

Refinancing more homeowners to more-affordable payments would help take financial heat off the entire country.

"A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers' mortgage bills right away and allow them to spend elsewhere," says The New York Times, reporting on a massive refinancing program that the Obama administration reportedly is considering.

Adds Ezra Klein at The Washington Post: "That would mean up to $85 billion in stimulus a year, significant relief for many homeowners who are struggling to make their payments, and the beginning of a new effort to address the troubled housing market."

The problems

The problem is that, as the rules stand, few homeowners who'd benefit can qualify. Post continues after video.

True, mortgage applications increased this week by 6.3% after a few weeks of declines.

Even so, relatively few people are buying. CNBC.com reporter Diana Olick quotes Capital Economics economist Paul Dales:

The clear problem is that households are not taking advantage of low mortgage rates. Even though 30-year rates have fallen to a record low, the 90% gain in mortgage applications for refinancing since April is modest compared with the surges in 2003 (720%), 2009 (560%) and 2010 (240%).

What about new government refinance programs?

The Federal Housing Finance Agency disclosed this month that it's exploring ways to expand eligibility for refinancing under HARP (the Home Affordable Refinance Program).

And Sens. Barbara Boxer, D-Calif., and Johnny Isakson, R-Ga., are pushing the Helping Responsible Homeowners Act of 2011, which would let so-called underwater homeowners refinance if they are current on their mortgage payments.

Millions of mortgage holders could benefit if the bill became law and removed Fannie and Freddie's upfront fees and restrictions on negative equity.

But there are several serious obstacles to that plan.

Klein, The Post's economic policy analyst, says such plans are probably not saleable to Republicans or the Federal Housing Finance Agency.

"Both (FHFA head Edward DeMarco) and the Republicans in Congress seem mostly interested in limiting Fannie and Freddie’s short-term losses so they can be spun off from the government," writes Klein.

Also, Klein says, banks might have to eat some of the fees for each loan, something they'd presumably be loath to do.

And there's also the problem of lenders' liability for the refinanced mortgages -- an issue known as "reps and warrants." HousingWire explains, "Through rep and warranty claims, investors of mortgage-backed securities can hold originators accountable for soured loans they feel were not underwritten properly."

Says HousingWire:

If the Obama administration's program does not force Fannie and Freddie to waive its right to force lenders to buy back the refinanced mortgage should it slip into default, lenders may not participate.

Explains Klein:

When banks refinance a mortgage, they basically take on the risk that the mortgage wasn't constructed right in the first place. In a refinancing situation -- particularly a refinancing situation where you're dealing with homeowners who might default -- they don't usually want that risk.

That option, however, "is worth billions to the mortgage giants," says Klein, who essentially calls the whole predicament a stand-off.

More on MSN Money:

• Can housing refis rescue the economy?
• Foreclosure filings jump 7%
• Calculator:How much house can you afford?
• 5 surprising facts in US income report
• Calculator:Should I refinance?
• Closing fees: Highest, lowest states