September 1, 2011

Mortgage Reality Distortion Field

Robert X. Cringely, writing for I, Cringely:

"A quarter of those homeowners in good standing have no equity left in their homes at all and the rest have significantly less than they once did — often not enough to qualify for a new mortgage. So they just keep paying on the old one, which is at a significantly higher interest rate.  That’s why we saw a refinance flurry in 2008 that has since, for the most part, vanished.

Rates are down, sure, but qualifying rules are stricter and there are at least 30 million U.S. homeowners who are literally trapped in their old mortgages. A few walk away, but most don’t because they worry about ruining their credit. And this means that while new 30 year mortgage rates are in the 3-4 percent range, the average rate paid by these trapped homeowners on their old mortgages is twice that.  And since their loan initiation overhead was amortized years ago, their actual yield is even higher."

Interesting perspective on mortgage refinancing. You'd think that with long-term fixed-rate mortgage rates at historic lows there'd be a wave of refinancing going on. But there isn't. Cringely puts his finger on the reason.