Refinancing unavailable for many borrowers

The refinancing wave that swept the nation when mortgage rates hit historic lows last year is petering out, leaving behind millions of homeowners who could not qualify for the best rates.

Half of the nation's borrowers have mortgages with rates above 6 percent even though the average rate on 30-year, fixed-rate mortgages has been about 5 percent for most of the past year, according to research firm First American CoreLogic.

More refinancing activity would have helped household budgets, but also the national economy because homeowners might have spent some of the extra cash they pocketed, giving the recovery an added lift.

Many borrowers who tried to refinance have found they're stuck because the value of their homes has tumbled and their equity has melted away. Others have been shut out because lenders tightened their requirements, demanding stellar credit and low debt.

An effort by the Obama administration to overcome some of these challenges has fallen flat, frustrating many homeowners -- especially with mortgage rates expected to rise by year's end, if not sooner.

"We've reached the point of burnout," said Amy Crews Cutts, deputy chief economist at Freddie Mac. "Most of the people who can refinance today have done so already."

Usually, borrowers refinance if they can save at least one percentage point on the interest rate, mortgage experts say, and even a savings of as little as half a point may make sense under some circumstances. Ultimately, the decision depends on whether the savings come in a time frame that makes sense for the borrower.

Elaine Lewis and her husband are among those who were shut out. They could not refinance their Silver Spring house this month because it was appraised at $448,000 -- $60,000 less than they paid in 2004. They still have equity in the house. But because that equity is less than 20 percent, they are required to pay private mortgage insurance.

As they see it, their options are to pay the mortgage insurance and related upfront costs or come up with enough cash to pay down their principal, beefing up their equity so insurance won't be necessary.

"Neither of those choices made financial sense since people refinance to save money, not to spend money," Lewis said. "It was terribly disappointing."

Other borrowers have no equity, or they owe more than their homes are worth, making it nearly impossible to refinance. These "underwater" borrowers make up about a quarter of all households now that national home prices have plunged an average of 30 percent from their peak in 2006.

'Context is everything'

Refinancing activity took off after the Federal Reserve committed to buying a huge chunk of mortgage-backed securities in late 2008 to help loosen consumer lending. Mortgage rates immediately dropped below 6 percent and stayed there through 2009. They dipped below 5 percent last spring, and then hit an all-time low of 4.71 percent in early December, Freddie Mac reported. They have hovered around 5 percent since.