Dan's Papers -December 19, 2008 - Estate of Mind - LOW INTEREST RATES for THOSE WHO DON'T NEED 'EM

In a chain of events that might define just how recovery in the mortgage lending arena could play out, there's been a recent rush on refinance applications as mortgage rates have dropped. Some pundits are predicting the rate to reach as low as 4.5%. But an even more startling statistic is that 12 million homes (15% of all homes with existing mortgages) will not be eligible for a refi with lower rates. Why? Because those 12 million homes are worth less than their existing mortgages, and to qualify these days, industry insiders are putting eligibility at 20-30% equity in the home, plus a credit score of 720.

Which means that those in trouble will basically not get relief through this change, and those who were never in trouble could enjoy a reduction in their monthly mortgage payments.

When the Federal Reserve Board announced a few weeks ago that it was purchasing $500 billion of Freddy Mac- and Fanny Mae-backed securities and reducing the rates for lending, one intent perhaps was to stimulate sales by new homebuyers who could take advantage of interest rates at 4.5% - much lower than the standard 6.5% of just three years ago, when the mortgage mess was beginning to hit critical mass. In essence, a lower interest rate could raise the magic number of what a potential buyer could afford, as well as lower payments on the buyer's targeted price point.

An unnamed insider at an East End refinance institution admitted the intention of the Fed was not to stimulate refinancing for those who can afford it and are in very strong positions. But since "the smart money always sees the smart opportunities," that is what is happening. In fact, during the short week of Thanksgiving, applications for refinance were triple what they were a year ago. But applications are still only one quarter what they were during what some people are calling the massive fraud era. So instead of new buying activity in the tundra of Hamptons home sales, the wealthiest of the wealthy are finding ways to maintain their mansions at record low rates. As it is, many of those well-heeled homeowners carry mortgages not because they have to, but to maximize income tax benefits. The unnamed source said, "We know who they are, we know they will pass with flying colors, so we are contacting them or their representatives and giving them a shout. It's smart business."

Asked if this was affecting the amount of money available to first time homebuyers, the source gave a less definitive answer. "Money is always available to new home buyers, it is our business. But due diligence is making it tougher for people without proven track records of paying mortgages, and who aren't really well financed in all aspects of their lives, to get homes than it is for the winners to refinance.

So the good news is if you own over 30% equity in your home and your credit score is over 720, which is nearly perfect, then you are eligible for some refinancing at post World War II rates. A low of 4.5% might offset the sting of how your mutual funds, 401K, other retirement plans, and the rest of your investments are performing.

However, those who experienced a drop in income; those trying to sell their homes, which have dropped in value at least 11% Hamptons-wide in the last year; and those whose equity in the home is less than 20%, shouldn't be overly optimistic on either refinancing or tapping into existing equity to raise cash.

Professor Carrington at George Washington University Business School used to say, "You never borrow money to pay bills. Doing that doesn't address the problem and just puts you in more debt, making a bigger problem. Borrow money to finance expansion, or invest in other income producing ventures."

The smart money is reducing costs because they can afford to, while those in trouble aren't eligible to reduce the very costs that might be sinking them. In other words, those who don't need the loans can get them; those who really need help are unwelcome. With one out of 10 homes with financing in some form of foreclosure or delinquency nationwide, it's a dilemma.

How will this trend end? With jobs disappearing at record rates, savings at record lows and confidence in Wall Street shattered, not many people are predicting 2009 to be the best year ever. Many are just hoping it won't be the worst year ever.