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Challenges, Mortgage Refinance Remains a Viable Option

Richard Barrington
LoanBiz Columnist

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Interest rates have edged up, and home prices are decidedly down in much of the country. These would not seem like good conditions for the home refinance business, but even though the market has slowed, industry professionals are still seeing some refinance demand. It seems there are times when personal circumstances simply trump market conditions.

Lower Rates: Not Enough Motivation to Refinance
After getting down to 5.48% in January of 2008--not far from their all-time low--30-year mortgage rates had climbed by nearly a full percentage point by the end of June. With refinance rates moving similarly higher, low mortgage rates became less of a motivation for refinancing.

Meanwhile, home prices have fallen substantially. According to the S&P/Case-Shiller Index, the median home price nationally was down 15.3% for the year ending April 30th, 2008. Bill Ferrall, Director of Business Relationships with the Tahoe Lending Group in Nevada, sees home prices as a bigger factor than interest rates in dampening refinancing. "When a life event dictates a need for refinancing, the rate becomes secondary," Ferrall explains.

Lower home prices, on the other hand, act as a constraint on refinancing by reducing or eliminating equity available for cash-out refinance loans. This, along with tightened qualification standards, is what has slowed refinance activity. Eric Eckardt, Principal Broker with Preferred Home Funding in Saratoga Springs, New York, does not see housing market conditions improving until next year. "There is still a lot of uncertainty in the marketplace with recession fears, inflation, rise in energy costs, and whether or not we've hit the bottom of the credit crunch," Eckardt cautions.

Despite the obstacles, Ferrall sees some continuing demand for refinancing, driven by compelling circumstances, "Most of the refinancing we're seeing right now is not driven by trying to get a low mortgage rate, but by life events--divorce, college, and other things which create a short-term need for cash."

Refinancing Decisions and Life Events
When home owners face those life events, Ferrall recommends starting with the big picture, "I look beyond the mortgage to their overall debt and asset structure to see if there are other avenues for cheaper money. Most of the time there aren't, because a mortgage is a preferred type of debt--that is, it usually has a lower rate and can be tax deductable."

Beyond that, refinancing decisions are greatly shaped by personal circumstances. Ferrall gives the example of a family putting a child through college. In those cases, people often opt for an interest-only strategy. Ferrall says this can be viewed as, "a five- to seven-year plan, to get a kid through college, after which they can downsize the home. This way, the payment doesn't get out of control in the meantime."

Home Refinance: Signs of Optimism
While life events will continue to prompt some refinance activity, a rebound in housing prices would make more equity available for cash-out refinancing. While cautioning that real estate is "very micro," Ferrall expects that conditions should begin to improve in most markets.

"I'm seeing signs that buyers are coming back to the market," he says. "Inventories of homes were at all-time highs, but are beginning to come back down. For example, Reno had 12 to 13 months of standing inventory a while back, but now it's down to 10.4 months."

Robert Withers, President of Withers & Company in White Plains, New York, also sees  "absorption of inventories" as a key to turnaround. Withers' primary market includes New York City and the surrounding area. Beyond his outlook for the housing market, Withers has a vision of where the mortgage industry itself is going, "For mortgage lending, the sustainable model in the end is competitive programs but conservative lending.”

Withers sees that as a model designed to benefit both borrowers and the industry itself.


  Sources:
Freddie Mac
Standard & Poor's/Case-Shiller

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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