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Will New Lending Program Raise Rates?

A new financing program unveiled today is aimed at helping millions of Americans whose homes have plunged in value, but experts say it may cause some collateral damage — rising mortgage rates.

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Federal regulators this morning released details of a major overhaul that will allow borrowers to refinance regardless of how far their homes have fallen in values; previously there were limits. That could let another 20 million who until now couldn’t refinance to do so.

But while the plan is expected to remove other hurdles from the refinancing process, such as appraisals and some underwriting requirements, experts say the likely boost in demand for refinancing could lead to higher mortgage rates and longer waiting periods for homeowners. “It’s going to be a problem to some degree,” says Keith Gumbinger, vice president at mortgage-data firm HSH Associates.

Housing experts say there are two ways interest rates may play out. If mortgage rates fall between now and Dec. 1, when the plan will be rolled out, there will be a spike in mortgage applications as well as a rush of borrowers to refinance under the new plan, says Gumbinger. In that situation, lenders may take advantage of the extra demand by choosing to offer rates that are higher than the lowest available, he says.

Many lenders have already been charging higher mortgage rates. Earlier this month, the lowest rate offered by LendingTree’s network of mortgage lenders was 3.5% on a 30-year mortgage, while the average rate actually given to borrowers was 4.28%. That spread has narrowed since then to 61 basis points (3.88% being the lowest rate vs. 4.49% the actual average rate given) in part because demand for mortgages dropped.

To be sure, for most of these borrowers, the new mortgage rates will be lower than the rates they’re currently paying, since many bought their homes years ago when rates were well above 5%.

And if rates continue to slowly rise between now and the rollout of the plan, the spread between the lowest rates available and the average rates may not change, say experts, since the drop in demand for mortgages will be made up for by the influx of refinancers.

Along with the possibility of higher mortgage rates, it may take longer for borrowers to refinance, analysts say. In a healthy housing market, the process usually doesn’t take more than 30 days, but it’s now taking about 45 days, says Gumbinger. With more borrowers jumping in to refinance that period could increase even more.

If that occurs, experts say borrowers may want to consider locking in their mortgage rate so that the rate they’re initially approved for stays the same even if market rates move higher. Locking in for up to 45 days typically doesn’t come with a fee; at most, borrowers would have to make a small payment that could be credited to their closing costs or refunded. But locking in a rate beyond 45 days might require paying a fee that’s 0.25% to 0.50% of the mortgage. Borrowers have to consider whether paying this fee is worth protecting against the possibility of rising rates, say experts.

Many of the obstacles borrowers will face could come down to an issue of timing, say housing analysts. In general, December is a slow time for mortgages. Borrowers who want to try to avoid the crowds at their lender could benefit by taking a few steps over the next few weeks. That includes getting all their documentation, including proof of income, together and checking their credit report. Once plan details are announced, they should contact their mortgage lender to work on beginning the refinancing process.


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