Only 3% of total mortgage universe qualifies for re-fi

The rise in US mortgage rates has prompted a sharp decline in the number of refinancings according to data released yesterday by the Mortgage Bankers Association.

High rates come at a time when homeowners are struggling to refinance mortgages because home values have fallen and banks have tightened their lending standards. According to RBS Greenwich Capital, just 3 per cent of the mortgage universe currently qualifies for refinancing. Two months ago that figure was 35 per cent.

The rise in mortgage rates prevents home owners from being able to refinance their home loans at lower levels. In past periods of economic distress, home owners have tapped the equity in their houses and used that to bolster consumer spending.

Rising US interest rates, combined with the financial pressures on Fannie Mae and Freddie Mac, the government sponsored enterprises (GSEs) which own and guarantee $5,300bn of US home loans, are compromising liquidity in the mortgage market, including those backed by pristine credits.

“We do not know who will be the end buyer of mortgages,” said David Ader, strategist at RBS Greenwich Capital. “The Feds have spoken and provided support to Freddie and Fannie. That’s fine for their debt, but how does it help mortgages or housing?”

Last week, Freddie Mac fanned worries about the ability of the agencies to buy more mortgages when it issued a warning to that effect in a regulatory filing.

The absence of a market bid from the GSEs could come as other investors, such as large financial institutions, are selling agency-backed mortgages to raise needed cash.

“You have these financial institutions that need to deliver their balance sheets,” said Bill Bellamy, director of fixed income at Thompson, Siegel & Walmsley. “The thought is that the issues [Fannie and Freddie] are confronting takes them out of buying more mortgages.”

While a rise in yields on US Treasury bonds has contributed to higher mortgage rates, the main source of pain for homeowners has come from the bigger rise in risk premiums for mortgages. Mortgage rates are based on Treasury yields, but they also trade at a spread over government bonds, and concerns about the credit quality of mortgages has weighed on their value.

Greg McBride, senior financial analyst at Bankrate.com said: “There are still a lot of concerns about credit quality on mortgages. With earnings announcements, we continue to see large reserves being set aside for loan losses and the continued decline in home prices has many investors nervous about more fore- closures.”

Factors unrelated to the financial woes of Fannie and Freddie also contributed to the selling of mortgage-backed bonds in the past week. Servicers of mortgages hedge against prepayments by buying mortgage-backed bonds.

Full article here.