• Bernanke's Bid to Revive U.S. Housing Scuttled by Rising Rates, Defaults

• Bernanke's Bid to Revive U.S. Housing Scuttled by Rising Rates, Defaults

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Bernanke Bid to Lift Housing Scuttled by Rising Rates (Update1)
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By Brian Louis and Oshrat Carmiel

May 29 (Bloomberg) -- Kyle McGee went to his mortgage broker’s office yesterday hoping to refinance and save about $200 a month. He walked away empty-handed.

McGee was expecting a rate of 4.7 percent; the broker offered him 5.375 percent. The average 30-year fixed-mortgage rose to 5.27 percent as of yesterday, according to Bankrate.com.

“We feel like we might have missed the boat,” said McGee, 37, an adjunct professor of social work at Hunter College School of Social Work in Manhattan.

Federal Reserve Chairman Ben S. Bernanke’s efforts to bring down borrowing costs to revive the housing market and help the economy are stalling. Mortgage rates are almost back to where they were in March before the 30-year rate fell to a record and sparked a refinancing boom. Mortgage delinquencies rose to a record 9.12 percent of U.S. home loans and house prices dropped the most on record in the first quarter, industry reports show.

“Housing is not going to be the engine to get us out of this recession,” said Robert Eisenbeis, chief monetary economist for Vineland, New Jersey-based Cumberland Advisors Inc., and former research director at the Federal Reserve Bank in Atlanta. “They’ve squeezed a lemon and now they’re trying to squeeze some more, but you can only get so much juice out of a lemon.”

Rates are rising as President Barack Obama is trying to spur a housing recovery. Obama has pledged to spend $275 billion to help keep as many as 9 million Americans in their homes and stem the rise of foreclosures. His measures also include a tax break of as much as $8,000 for first-time homebuyers that wouldn’t require repayment.

Refinancing Falls

On April 9, Obama cited interest rates at less than 5 percent and the foreclosure program as the two top reasons for people to buy or refinance a home. “We are at a time where people can really take advantage of this,” he said.

Homeowners aren’t cooperating. Refinance applications this week fell 19 percent to the lowest since early March, before the U.S. announced a loosening of Fannie Mae and Freddie Mac rules to allow more borrowers with little or no home equity to arrange new loans. The Fed also announced increased purchases of mortgage-backed securities and a program of buying Treasuries.

The 30-year fixed rate fell to a record 4.78 percent twice in April, according to Freddie Mac, the McLean, Virginia-based mortgage buyer. The average rate for a 30-year loan rose to 4.91 percent from 4.82 percent a week earlier, Freddie Mac said yesterday.

Rates at historic lows have convinced prospective buyers and homeowners that even 5 percent seems high, said Greg McBride, senior financial analyst at Bankrate in North Palm Beach, Florida. Yesterday’s rate of 5.27 percent is the highest since February.

‘Magical Four Percent’

“People are looking for that magical four percent,” said McGee’s broker, Norman Calvo, chief executive officer of Universal Mortgage Inc. in Brooklyn, New York. “When you get there you have that feeling of ‘Oh my God it’s the best thing, I’ve got to buy.’”

Calvo said that after months of doing largely refinancing work, in April and May his company was doing 50 percent refinancing and 50 percent mortgages for purchase.

Freddie Mac estimates 73 percent of the projected $2.7 trillion of mortgage originations in 2009 will be for refinancing. In 2005, when the annual rate of home sales peaked, 48 percent of the $3.3 trillion in mortgages were refinancings, according to Freddie Mac. Refinancing originations may rise 145 percent to $1.87 trillion this year, according to a Mortgage Bankers Association estimate, the first increase in four years.

Mortgage Buying

The Fed plans to buy as much as $1.25 trillion of mortgage- backed securities and up to $300 billion in Treasuries as part of a plan to lower rates. Minutes of the central bank’s April 28-29 meeting show some officials said the Federal Open Market Committee may yet boost asset purchases to spur a more rapid economic recovery.

The central bank’s purchases of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae had brought down the yields of those securities, allowing lenders to reduce the rates on new home loans and still sell the mortgage securities at a profit. Fannie Mae and Freddie Mac are government-chartered mortgage companies that are being supported by $400 billion of back-up taxpayer capital. Federal agency Ginnie Mae packages low-down payment loans insured by the Federal Housing Administration into securities.

Yields on Fannie Mae and Freddie Mac mortgage bonds rose earlier this week, driven higher in part by climbing Treasury rates. The yield on the 10-year Treasury note was at 3.64 percent yesterday, compared with 3 percent the day before the Fed’s March 18 announcement.

Less Spending

“The Fed has to step up the purchases just to keep rates from rising further,” McBride said. “As much buying as the Fed is doing this year of Treasuries and mortgage-backed debt almost exactly equates to the amount of new Treasury debt being dumped onto the market.”

The decline in refinancing leaves consumers with less to spend to help the ailing U.S. economy. Mortgage delinquencies and foreclosures rose to records in the first quarter as rising unemployment led consumers to default.

The U.S. delinquency rate jumped to a seasonally adjusted 9.12 percent from 7.88 percent, the biggest-ever increase, and the share of loans entering foreclosure rose to 1.37 percent, the Mortgage Bankers Association said yesterday. Both figures are the highest in records going back to 1972.

Rising Yields

The group’s mortgage refinancing index is 48 percent lower than in January when it hit a six-year high.

Treasury yields are rising as the U.S. government sells debt and investors anticipate more supply of government securities being sold to fund federal spending. That in turn is helping push mortgage rates higher.

“There was an expectation on my part that the program wasn’t sustainable to end of year because of supply pressures,” said Jay Brinkmann, the Mortgage Bankers Association chief economist. “This turnaround is a few months earlier than I would have expected but I knew these pressures were coming.”

For McGee, who has a $1,600 a month mortgage payment, higher rates mean less money in his pocket. McGee may have been able to save about $200 a month with a 4.7 percent loan. There’s no way for him to get that savings with a new rate unless his two bedroom co-op in the Kensington area of Brooklyn is appraised at $10,000 more than the 2007 purchase price, he said.

“People are still struggling with the amount that their homes are worth right now, so having the interest rates go up, even if it’s still relatively moderate, kind of tips the balance a bit more toward people holding off on making a change,” McGee said.

To contact the reporters on this story: Brian Louis in Chicago at blouis1@bloomberg.net; Oshrat Carmiel in New York at ocarmiel1@bloomberg.net.
Last Updated: May 29, 2009 08:31 EDT

 

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bernanke is a moron.