A sharp rise in home loan refinancing last year pushed down mortgage payments in the Sacramento valley and put millions of dollars back into the local economy, new federal statistics show.
Almost 60,000 Sacramento families – one in six households with a mortgage – refinanced their home loans in 2012, more than double the number that refinanced in 2011, according to new federal data released earlier this month. Another 10,000 investors refinanced mortgages on Sacramento-area homes.
Low interest rates, rising home values and changes to a federal program that helps homeowners refinance explain the trend, several experts said. Most homeowners refinance to lower their monthly mortgage payments.
The consequences have been felt throughout the local economy. Less money paid to the bank every month means more money for dining out, making home improvements, buying new clothes and myriad other expenditures that contribute to regional economic growth.
“It puts more disposable income in people’s pockets,” said Jeffrey Michael, director of the Business Forecasting Center at the University of the Pacific.
South Land Park resident Carrie Paine used the money she saved from refinancing her home loan to replace a 15-year-old Mazda with almost 200,000 miles on it. “I always worried I’d break down with my toddler in the car,” she said.
Paine’s monthly mortgage payment dropped from about $1,550 to $1,300. She has a 30-year home loan with a 3.75 percent interest rate.
Across the Sacramento region, homeowners’ median monthly costs – mortgage, tax, insurance and utility payments – fell to $1,842 in 2012, continuing a four-year decline, according to U.S. Census Bureau figures. Four years earlier, typical monthly owner costs were about $2,175, or 15 percent higher.
Meanwhile, the region’s economic output grew by almost $5 billion during 2012, the fastest rate of growth in seven years, according to new figures from the U.S. Bureau of Economic Analysis.
The trend likely continued well into 2013 but tapered off some in the last three months as loan interest rates rose, several mortgage brokers and lenders said. But “it’s still a very good market,” said Donna Bland, president at The Golden 1 Credit Union, “Sacramento is recovering.”
A few years ago, at the start of the housing bust, refinancing a home loan was not possible for many Sacramento residents. The bust pushed home prices so low that thousands of local families went “underwater” on their loans: they owed more than their homes were worth.
Banks were often reluctant to help these homeowners refinance, and federal programs designed to help underwater homeowners didn’t work as advertised. Unable to afford high payments or refinance, many Sacramentans lost their homes to foreclosure.
The slowdown in home loan refinancing continued through most of 2011. Then, a few things changed.
First, interest rates fell to historic lows as the U.S. Federal Reserve bought bonds and other securities to encourage more lending. By the end of 2012, typical rates on a 30-year mortgage were well below 4 percent.
“It’s rate-dependent,” Brent Wilson, a mortgage strategist at Comstock Mortgage, said of the trend in refinancing. Many of the families he helped refinance went from a loan with an interest rate of 5 or 6 percent to a loan with a rate of about 3.5 percent.
Second, the federal government retooled its Home Affordable Refinance Program, or HARP.
The original version of HARP, introduced in 2009, allowed homeowners to refinance only if they were slightly underwater, with loan balances not much higher than their homes were worth. Many in the Sacramento region had sunk much deeper and were ineligible for the program.
The newer version of HARP, introduced in late 2011, allows homeowners with a loan backed by Freddie Mac or Fannie Mae to refinance regardless of the difference between what they owe and the value of their home. Refinancing under HARP lowered mortgage rates “by a point to two or three points,” said Kathleen Beck, a local mortgage lender. “It’s very cost-effective.”
Finally, home values began to rise sharply in mid-2012, a trend that has continued into this year. Many homeowners who were once underwater can refinance without going through a special government program.
Several mortgage experts said they’ve also seen a rise in “cash-out” home refinancing due to the sharp increase in home values. During these transactions, homeowners borrow against the equity of their homes and often receive a significant amount of money.
“We are seeing a resurgence in the home equity product,” said Richard Musci, senior vice president and chief lending officer at Golden 1.
Michael, the UOP economist, recently refinanced his home and took out cash for home improvement. “Now, I have solar panels on my house,” he said.
Home equity loans carry risk. Cash-out refinancing was one of the primary culprits for the housing bust.
During the preceding housing boom, some residents effectively used their homes as banks, refinancing into loans they couldn’t afford and hoping to refinance again as home prices continued to rise. When home values instead started to fall, many who used this form of refinancing lost their homes.
Several mortgage experts said they doubt that would happen again soon because banks now are more careful when lending. “Every lender is looking at every piece of documentation,” Beck said.
Whether the region continues to see a high rate of refinancing depends largely on mortgage interest rates, several experts said. In the last couple of months, mortgage rates have risen by about a full percentage point as the market anticipates the Federal Reserve will reduce its efforts to stimulate the economy. At 4.5 percent for a 30-year home loan, rates are still below historical averages. But refinancing at that rate doesn’t pencil out for nearly as many people who could benefit from refinancing at 3.5 percent.
Musci, the Golden 1 official, said refinancing at his credit union has slowed “20 or 30 percent” since rates have risen. Wilson, the Comstock official, said he’s seen a more than 50 percent decline in refinancing.
No one expected interest rates below 4 percent to last forever, Musci and others said. And rates are still low enough to drive a healthy amount of refinancing, they said, particularly if home values continue to rise.
“I was really surprised to see that it stayed at the sub-4 percent level as long as it did,” Michael said. He added that due to the low interest rates “debt service levels are down to the historical levels where households start borrowing.”
Source: Sacramento Bee