LAKEWOOD RANCH – One day after the Federal Reserve said it was prepared to print vast sums of money to shore up the credit markets and buy up troubled debt, the effect on mortgages is already being felt in Southwest Florida.
Interest rates for 30-year fixed mortgages fell below 5 percent for the first time since summer 2003, when they broke that barrier for just a few days. Sustained rates in the 4 percent range have not been seen since the 1950s.
The average rate was 4.875 percent Wednesday afternoon — a drop of 0.625 percentage points in less than 24 hours and a number that has not been seen since August 1956. Late in the day, rates rose back to 5.25 percent, likely the result of a flood of applicants clogging the system, experts said.
On Wednesday morning, a dozen mortgage brokers braved the fog to gather at a Lakewood Ranch coffee house. Billed as “Mortgage Mocha,” the networking event organized by the local chapter of the Florida Association of Mortgage Brokers brought out a crowd energized by the Fed’s move.
“Who would have thought rates would be under five?” asked Mike Tullio, senior mortgage consultant at Blue Skye Lending. “I’m psyched. This is incredible.”
Don Stilts, regional manager for 1st Signature Lending, told the group, who sat in a circle sipping on their coffee: “We’re in uncharted waters. I’ve never seen anything like this before.”
Several other brokers also traded tales of increased activity, as both new buyers and those looking to refinance were calling to take advantage of the historically low rates.
The Fed’s short-term rate cut to virtually zero likely had little effect on mortgage rates, which have traditionally followed 10-year U.S. Treasury notes instead. But 10-year notes dropped as well this week, to their lowest yield since the 1960s, as investors poured in to scoop them up after the Fed’s indication that overall interest rates could be kept low for the foreseeable future.
There were 30-year fixed mortgages available Wednesday in Southwest Florida for about 4.87 percent with no points or extra fees. Adding a few points — each point is equal to one percent of the purchase price — could bring the rate down past 4.5 percent or even close to 4 percent.
Mortgage application volume jumped last week, fueled by borrowers seizing on lower rates to refinance home loans, the Mortgage Bankers Association said. The trade group’s seasonally adjusted application index rose 2.9 percent to 841.4 in the week ended Dec 12. The index stood at a revised 817.7 a week earlier.
The federal government had recently floated the idea that getting rates to 4.5 percent would help spur home sales and re-energize the refinancing market.
The Fed’s move also caused the “prime” rate charged by commercial banks, which many adjustable home equity lines and second mortgages are tied to, to fall to 3.25 percent — also its lowest rate in more than 50 years.
“It’s like they’re giving money away right now,” Tullio said of the prime rate drop.
But the positive developments may leave one important class of homeowners still twisting in the wind — those who are “underwater,” owing more on their mortgages than their homes are now worth.
“This is the greatest opportunity that I’ve ever seen to buy, but there are a couple of notable stumbling blocks,” said Sentinel Mortgage’s Frank Fontanetta in a separate interview on Wednesday.
Those blocks are the diminished home values plaguing the underwater owners, for whom lower interest rates unfortunately do not mean much.
“Those people cannot refinance; there’s really nothing they can do,” he said. “Generally they can’t sell it either. They’re just stuck.”
So far, government programs like the Hope for Homeowners, which provides a guarantee for lenders if they reduce the loan principal by a specified level, have not caught fire with banks. In fact, only a few hundred borrowers in the entire country have been helped so far by the program, which was intended to save more than 400,000 from foreclosure.
Congressional leaders as well as the Federal Deposit Insurance Corp. have pushed the Treasury Department to use money from the Troubled Asset Relief Program, known as TARP, to help underwater homeowners at risk of defaulting. Treasury has thus far resisted.
Meanwhile, for mortgage brokers looking to survive, lower interest rates that can prime the pump for new borrowers are a very welcome development.
Bryan Ehrlich woke up at 5:30 a.m. to drive nearly 80 miles from New Port Richey just to attend the brokers’ gathering on Wednesday. He said it was worth the trip to learn more about the new programs and brainstorm with his fellow brokers.
He also told those gathered that as the market struggles to right itself, the most important thing for those in the mortgage business is to be trustworthy because post-boom borrowers want the confidence to know they are in good hands. They have already seen what the dark side of the lending business can bring, and they have no desire to go down that road again.
“We should be fighting for higher entry standards into the industry,” said Ehrlich, president of Innovative Mortgage Services, based in Trinity. “Those who have less-than-desirable intentions should not be coming in anymore.”