Why Low Mortgage Rates Are A Problem

Hardly a week passes when mortgage rates do not hit another historic low. This sounds really good – especially if you’re a borrower – but the reality is that microscopic loan rates suggest an economy which remains deeply troubled along with home values unlikely to rise.

At the end of May Freddie Mac said “the 30-year fixed averaged 3.75 percent setting a new all-time record low for the fifth consecutive week. The 15-year fixed averaged an unprecedented 2.97 percent.”

There’s no doubt that such rates are astonishingly good. Super-low rates mean millions of homeowners can refinance and reduce their monthly costs. Borrowers with ARMs do not have to fear rate hikes — as long as interest levels remain in a trough. And today’s low rates are available across-the-board with VA loans, FHA mortgages and conventional financing. It doesn’t matter if you’re buying a traditional home, a short sale or a foreclosure.

Mortgage Applications

The catch is you have to be qualified to get financing and many borrowers today are running into tremendous problems during the application process. According to Federal Reserve Chairman Ben Bernanke, “tight lending standards and terms remain especially evident.”

Bernanke said one recent survey of bank loan officers found that even with 20% down many lenders still will not approve qualified borrowers.

“Most banks,” explained the Fed chairman, “indicated that their reluctance to accept mortgage applications from borrowers with less-than-perfect records is related to ‘putback risk’ — the risk that a bank might be forced to buy back a defaulted loan if the underwriting or documentation was judged deficient in some way.

Urban Legends

Concerns about put-back risk have now attained the status of urban legend. Lenders allegedly worry that they may have to buy back loans because of some minor clerical error or application oversight.

The reality is that lenders issue huge numbers of mortgages each year and it’s enormously difficult for investors to force lender buybacks. The usual standard is not a paperwork glitch, instead it’s a mortgage where the borrower has not made one or more payments during the first 120 days of the loan term or the mortgage was created through the use of fraud. Neither of these conditions is based on minor paperwork problems

Lenders who don’t make loans can’t maximize profits. No less important, borrowers who don’t borrow at today’s rates effectively express little confidence in the future. With rates where they are this should be a great time to borrow and invest, to borrow and create jobs, and to lock-in low rates for homes and investment properties.

It’s going to happen that mortgage rates will rise and when they do some will complain that higher rates are somehow unfair or unwarranted. In fact, higher rates will be a sign the economy has begun to get back on track.

Meanwhile, now is a very good time to finance or refinance.

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