October 7th, 2011 10:07 AM by Lehel S.
A new study by the Federal Reserve puts a number on a perplexing issue that has been on the minds of top officials in Washington of late. It finds that tight mortgage-lending standards and dramatic declines in home prices prevented about 2.3 million U.S. homeowners from refinancing last year.
The annual report, released Thursday, underscores the difficulties that policy makers have had over the past two years in encouraging more Americans to refinance their mortgages and take advantage of ultra-low rates.
The report found that those homeowners would have been able to refinance their loans if not for strict underwriting standards enacted after the housing bubble burst, and for home price declines that left millions of Americans owing more on their properties than their homes are worth. About 4.5 million refinances were made last year, the study said. As of the end of June, 10.9 million U.S. borrowers, or nearly 23% of those with mortgages, owed more on their properties than their homes are worth, according to data firm CoreLogic. An additional 2.4 million had less than 5% equity in their properties — making it difficult to refinance.
The report analyzed data from more than 7,900 mortgage lenders, which are required to report detailed data on mortgage lending to the Fed and other regulators under the Home Mortgage Disclosure Act. In total, 7.9 million home mortgages — including refinances, home purchases and other loans — were made last year by the institutions analyzed in the report. That was down from nine million in 2009 and a peak of 21.5 million in 2003.
The White House in 2009 launched an initiative called the Home Affordable Refinance Program that allows borrowers whose properties have declined in value to refinance without putting down more cash. It has enrolled about 830,000 homeowners, far fewer than expected. The Obama administration and regulators have been working on ways to expand access to that program.
The report comes as maximum size of loans that can be backed by government-controlled mortgage companies Fannie Mae, Freddie Mac and the Federal Housing Administration is scheduled to decline at the end of the month. The new limits vary by location, but will drop to $625,500 in expensive markets such as New York, Los Angeles and Washington from the current $729,750.
Only a small number of loans are likely to be impacted by this change, the Fed researchers found. They calculated that only about 1.3% of purchase and refinance loans guaranteed by Fannie and Freddie and made last year would have been impacted had those lower limits been in effect. Adding in FHA loans, which are typically made to borrowers with low down payments, another 2.1% of home-purchase loans would have been affected.
However, the report expresses concerns about whether the “jumbo” market for loans above the federal limits can handle the increased lending volume. Those loans are typically held on banks’ portfolios, which would have to expand substantially.
“At least some of these loans would not have been originated or would have been originated only at higher prices,” the report found.