Locked Out of Refinancing

The Federal Reserve's huge gesture this week to keep already-low mortgage rates down seems to be working.

The average rate on a 30-year, fixed-rate mortgage was 5.15 percent when the Fed announced its plans midweek, slipped to 4.94 on Thursday then rose to 5 percent yesterday and chances are it will stay around there through year's end, according to HSH Associates, a mortgage research firm.

But not everybody will be able to get a break, especially people who do not have a lot of equity in their homes -- one of the biggest problems facing owners now as housing values drop. Even though the Obama administration recently rolled out a program to help such borrowers, many will be left out because they cannot meet the plan's minimum requirements.

"I've got one borrower who keeps hearing about all the promising news about interest rates and refinancing and I keep turning her away," said Dick Harbin of Monarch Mortgage in College Park. "I feel like I'm always raining on her parade."

That borrower, Monica Banks Greene, was ecstatic when she heard of the administration's effort to make refinancing possible for as many as 5 million households with little or no equity in their homes. The plan targets borrowers such as Greene who are on time with their payments yet cannot refinance because their home values have plummeted.

But Greene remains stuck in her old loan. Only borrowers who are no more than 5 percent underwater on their loans qualify for the program. Greene owes more than that. She bought her Largo house three years ago for $440,000. It's now worth about $390,000.

"I make decent money. I have great credit, and yet I still can't qualify," said Greene, a clinical psychologist and life coach. "Now, I'm waiting again for a plan that works for people like me."

There are other would-be borrowers who might qualify for loans now, but are holding back in the hope that rates will sink close to 4 percent. That's a number that surfaced late last year when there were news reports that the Treasury Department was considering a plan to intervene directly in the mortgage industry to dramatically force down rates.

But many who track the mortgage market say homeowners waiting for that rate will be disappointed. Some people have secured loans at rates below 5 percent, but not a full percentage point lower, and usually not without paying upfront fees called points.

"There are already rates in the low- to mid-4 percent range, but you're not going to get them for zero points," said Augie Zullo of Access National Mortgage in Reston. "And the lenders prefer credit scores of at least 720," out of a possible 850 on the FICO credit score scale. "If it's going to be a refinance, they want at least 25 percent equity. That's always the sticking point for people who got into their homes in the last five years." And most of these rates are for people borrowing $417,000 or less -- rates are higher for bigger loans or those that don't meet some other requirements.

Besides, by renewing its commitment this week to buy a sizeable chunk of mortgage-backed securities, the Federal Reserve was not aiming to push rates down to 4 percent, said Barry Habib, a mortgage consultant and chairman of Mortgage Success Source in New Jersey. Instead, it was trying to "put a lid" on existing rates, he said.

Even if economic conditions align to push rates much lower, many lenders are not inclined to pass on those rates to borrowers because they're overwhelmed by demand for new loans, especially after rounds of layoffs that left many of them without the workers to handle the influx.

"They want to slow down business," Habib said. "If anything, they're looking to raise rates. You only reduce prices to generate more business. So that's another problem for those who are waiting."

Add to that yet another risk: The longer borrowers wait, the more likely their loan is to sink deeper underwater because home values are expected to keep dropping at least through year's end in many parts of the country, said Greg McBride, senior financial analyst at Bankrate.com, a personal finance Web site.

"You could win the battle and lose the war if your home price declines to the point where you can't refinance."