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Robert Nusgart – European woes offer yet another chance to refinance

Thank you Greece.

Thank you Spain.

Thank you Portugal.

Thank you for fueling the European debt debacle that continues to make the American bond market a haven for skittish investors looking for a “flight to safety” for their money.

And when that happens, bond prices move up and yields move down and before you know it, the 10-year Treasury bond is at an all-time low. And mortgage-backed securities — cousins to the 10-year bond — are following suit as rates for a 30-year fixed mortgage begin to drift toward unheard-of levels.

Hence, that spawns another shout-out to refinance and a call to would-be home buyers: What are you waiting for? Home prices are at the lowest in a decade. Mortgage rates are at ridiculous lows. FHA continues to provide an option for borrowers who don’t have 10 or 20 percent to put down.

Just looking at the numbers is astonishing.

Last week, the yield on the 10-year Treasury was at 1.59 – an all-time low. A few months ago it was at 2.40.

Mortgage rates are not tied to the 10-year bond, instead you have to track mortgage-backed securities, but for the general public the 10-year is a good place to see where rates are trending.

Now you can find 30-year fixed rates hovering around 3.75 percent. To give you an idea of how that helps a borrower, last year, rates were around 4.875 percent. On a $300,000 loan the principal and interest payment at 4.875 percent is $1,587. Drop to 3.750 percent and the payment goes to $1,389 — approximately $200 a month savings.

Those borrowers who are going for an FHA government-insured mortgage are seeing 30-year fixed rates at the 3.50 percent level.

And just consider this: According to Freddie Mac, the average for a one-year adjustable rate mortgage in May 2010 was 4.01 percent. Again, that was for a one-year ARM. Amazing.

Now there are schools of thought that rates should be even lower, given where the bond market is. Perhaps, but other factors will start creeping in to artificially keep rates from floating lower.

The first is that the majority of lenders can’t operationally handle the influx of originations. The staffing remains the same despite the increase in business. Therefore, lenders are requiring their loan officers to lock in at a minimum of 60 days and possibly all the way out to 90 days because it will take that long just to get the loan through the entire process.

And when a borrower has to be locked into a longer period, that typically means that the lowest rates won’t be offered. The longer the lock period, the higher the rate, and vice versa.

This is one way that lenders slow down the process and keep borrowers at bay.

Still, if the markets continue to trade at these levels there will be continued pressure to lower rates.

So that begs the question, how long will this continue?

It seems that as long as there is a European debt crisis coupled with wavering U.S. unemployment and economic numbers and domestic election year politics, there doesn’t seem to be much to spur rates well beyond the 4 percent mark.

Therefore, opportunities will remain for borrowers — if refinance fatigue doesn’t set in — to either lower their monthly payments or reduce their amortization and build equity.

FHA refinance program

Borrowers who have an FHA mortgage that was insured before June 1, 2009, can now get new case numbers to participate in HUD’s latest attempt to help its borrowers take advantage of the drop in interest rates.

For those FHA borrowers, they will be able to refinance without having to in effect add another large upfront mortgage insurance premium to their new loan amount, and they will be able to keep their current monthly mortgage insurance premium intact.

This is monumental change from current policy for those borrowers who have FHA mortgages after the June 1, 2009, date. For those borrowers, they have to contend with much higher upfront premium and higher monthly insurance premiums. Because of that formula, it usually cancels out any savings gained by a lower interest rate.

It is a shame that the government can’t allow all FHA borrowers to participate in the historic low rates that are now available. Why can’t the government allow borrowers to refinance while maintaining their current mortgage insurance payments? These borrowers are already paying mortgage insurance. If HUD allowed these borrowers to refinance, it is not as if it would be losing insurance premiums. In fact, it seems as if HUD would be allowing the borrower to be strengthened financially by lowering their housing payment. It doesn’t make sense.

The other oddity is that when you look at the loans originated in the years before June 1, 2009, the FHA portion was minimal compared to conventional Fannie Mae, Freddie Mac and other conventional loans. As the conventional mortgage market tightened guidelines in the aftermath of the mortgage meltdown, FHA originations took off since it allowed lower credit scores and lower down payments. So the bone being tossed by HUD is nice, but it reaches too few borrowers.

In any event, if you are an FHA borrower whose loan was insured before June 1, 2009, reach out to your loan officer or lender and inquire about refinancing. There is a good chance you will be able to save hundreds of dollars.

Robert Nusgart is a loan officer with Mortgage Master Inc. in Baltimore. He can be reached at 443-632-0858 or by email at rnusgart@mortgagemasterinc.com. Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.