The tables have really turned in the past couple years in terms of why American homeowners are refinancing. During the height of the housing boom, homeowners were borrowing against their equity like crazy, as their home values appeared to be headed quickly upward indefinitely.

Now, however, Americans are house poor and many are and have been at the mercy of high adjustable interest rates. In the most recent study from mortgage finance giant Freddie Mac, it looks like homeowners are overwhelmingly using refinance loans to lower those rates and cut their monthly payments.

Freddie Mac reported that in the third quarter of 2009, refinanced loans netted up to a total $3 billion in payment savings for the first year of the new mortgages for participating homeowners. One half of all those who refinanced conventional mortgages lowered their annual mortgage interest rate by 17 percent or more!

“Homeowners are benefiting from an extended period of very low interest rates. In the first nine months of 2009, interest rates on 30-year fixed-rate mortgages have averaged 5.1, the lowest such average in the 38-year history of Freddie Mac’s Primary Mortgage Market Survey,” noted Frank Nothaft, Freddie Mac vice president and chief economist. “At the beginning of the year, only borrowers who still had a solid equity cushion could take advantage of the low mortgage rates, but through the Homeownership Affordability Refinance Program that got underway in April, borrowers who have a loan owned by Freddie Mac or Fannie Mae can refinance that loan even if they have no home equity. As of August 31st, over 93,000 borrowers had taken advantage of this opportunity according to the Federal Housing Finance Agency, with the bulk of those occurring in July and August.”

And 64 percent of prime (good credit) borrowers who refinanced conventional loans in the third quarter retained the same principal balance or actually reduced it. That is the highest recorded percentage in six years. Only 36 percent of borrowers refinanced with “cash-out” loans. In total they pulled out $20 billion of home equity, the lowest amount in almost a decade.

Bottom line: If you can qualify, refinance now for payment savings. Interest rates are likely to rise starting sometime in 2010 and may not reach today’s lows for a long time to come.

Mortgage interest rates moved a little higher during the past week, but overall this has been a great year for rates according to mortgage finance giant Freddie Mac on Thursday.

The average rate on a 30-year fixed rate mortgage inched up to 5.03 percent, excluding points, from 5.00 percent the week before. One year ago, however, the average rate was more than a point and a half higher at 6.46 percent.

The average rate on a 15-year FRM grew to 4.46 percent, up from 4.43 percent last week and one-year adjustable rate mortgages carried an average rate of 4.57 percent, up slightly from 4.54 percent.

“Interest rates for 30-year fixed mortgages have averaged just below 5 percent this year, which is the lowest 10-month average since the survey began in 1971,” said Frank Nothaft, Freddie Mac vice president and chief economist. “As a result, refinance activity has accounted for almost seven out of ten mortgage applications on average this year.”

So why didn’t rates move much this week? According to a survey from BankRate.com, the incoming economic data sent mixed signals to the mortgage markets, as investors quickly bought up securities at a government debt auction early in the week, then consumer confidence and new home sales were down.  But then again, existing home sales showed strong gains, jumping up 9.4 percent in September from the previous month.

And although it is anyone’s guess what will happen to interest rates in the coming week and month, by historical standards there is no doubt that rates are fabulously low. If you are a potential homebuyer sitting on the fence, pre-boom home prices coupled with today’s rates make now a really good time to buy.

Former Federal Reserve Chairman Alan Greenspan is saying that the U.S. unemployment rate is going to break the 10 percent mark before long and hover there for awhile before the trend reverses.

Speaking with George Stephanopoulos Sunday on ABC’s “This Week,” Greenspan said

“…At some point, we’re going to start to see an improvement in employment, but remember that unless there is a monthly increase of more than 100,000 a month, you’ve still got the unemployment rate continuing to rise.”

“My own suspicion is that we’re going to penetrate the 10 percent barrier and stay there for a while before we start down,” he said.

His predictions are not all that shocking considering the Labor Department announced on Friday that the current unemployment rate has reached 9.8 percent.

Yet even as jobs continue to be slashed, the housing market seems to be doing just fine. Of course, the government tax credit for first-time home buyers might have a thing or two to do with that.

The National Association of Realtors announced last week that its pending home sales index rose 6.4 percent in August for the seventh straight month. Pending home sales are a loose predictor of actual home sales as they track signed contracts. And while actual sales have been on the rise, they have not matched the pending home sales pace as a certain percentage of buyers back out and as plenty of short sales are rejected by banks before closing.

And the tax credit set to expire December 1 has been a big contributor to the upswing in real sales over the past few months. One survey found that 43 percent of buyers in August were first-timers.

“No doubt many first-time buyers are rushing to beat the deadline for the $8,000 tax credit, which expires at the end of next month,” said NAR chief economist Lawrence Yun. “Sales will decline when the tax credit expires because we are not yet on a self-sustaining recovery path. It also raises a risk of a double-dip recession. Extending and expanding the tax credit is the best tool in our arsenal to encourage financially qualified buyers to stimulate the economy and help reduce the budget deficit.”

If the tax credit is extended, things could continue to look strong in the housing market as long-term mortgage interest rates fell below 5 percent again last week. I guess the question is whether the housing market can find a sustainable level of growth before unemployment figures level off.

For the first time since May, interest rates on long-term mortgage loans dropped below 5 percent this week, reaching near-record lows, according to mortgage financier Freddie Mac. The average rate on a 30-year fixed rate mortgage (FRM) plunged to 4.94 percent, excluding points, for the week ending Thursday, from 5.04 percent last week. Rates have not been that low since the week ended May 28 when it was 4.91 percent. Last year at this time, the average rate was much higher at 6.10 percent.

Other rates also fell significantly with the average on a 15-year FRM dropping to 4.36 percent from 4.46 percent, and the average on a one-year adjustable rate mortgage (ARM) dipping to 4.49 percent from 4.52 percent.

Freddie Mac says this is great for the housing market.

“Low mortgage rates are helping to stabilize home sales,” said Frank Nothaft, Freddie Mac vice president and chief economist. “New home sales in August rose to the highest annualized pace since September 2008 and the inventory of unsold houses fell to the lowest level since February 1983. Although existing home sales fell somewhat in August, it was still the second strongest showing in 23 months.”

Apparently the low rates from the past week were not enough to entice borrowers to the mortgage table, though. The Mortgage Bankers Association reported Wednesday that refinance applications were down by 0.8 percent for the week and home purchase applications were down 6.2 percent.

Even though rates are phenomenally low, the problem may continue to be that many potential borrowers just don’t have the credit to qualify these days. Those who really need to refinance are often behind in their payments or even underwater in their loans and are unable to take advantage of the rates. Others, like many potential first-time home buyers, may not have the down payment money or credit scores to get into a low rate home loan right now. Still, rock bottom rates are probably the best thing for the market until unemployment and foreclosure numbers start to stabilize.

The Federal Reserve governor made statements Friday that left the markets wondering if the Fed will drastically tighten interest rates when the time comes, instead of gradually increasing them.

Even though Fed Governor Kevin Warsh voted Wednesday along with the unanimous Federal Open Market Committee decision to keep the fed funds rate at “exceptionally low levels …for an extended period”, his comments in a speech yesterday to an international bankers convention in Chicago show he can conceive of the need for quick action in the future.

“The Federal Reserve acted preemptively in providing monetary stimulus, especially in early 2008 when the economy appeared on an uneven, uncertain trajectory. If the economy were to turn up smartly and durably, policy might need to be unwound with the resolve equal to that in the accommodation phase. That is, the speed and force of the action ahead may bear some corresponding symmetry to the path that preceded it.”

He added in a Wall Street Journal opinion piece Friday that, “prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary.’

His Chicago speech echoed such thoughts that the Fed might need to start fighting inflation with rate hikes even before the economy fully recovers.

“If policymakers insist on waiting until the level of real activity [GDP] has plainly and substantially returned to normal-and the economy has returned to self-sustaining trend growth-they will almost certainly have waited too long.”

I doubt that Warsh was speaking on behalf of all the Fed board members in his remarks and writing, but if any of his colleagues share his opinions, we may see mortgage interest rates jumping up much sooner and more significantly than many economists have been predicting.

It seems there can be no complete recovery of the housing market until the job market stabilizes. New data from Equifax, reported by Reuters news today, showed that the rate of mortgage delinquencies is climbing, and climbing fast.

According to the source, 7.58 percent of all U.S. mortgages were delinquent by 30 days or more in August, an increase from July’s 7.32 percent. This is the fourth straight month of rising delinquencies, and the current rate is up dramatically from a year earlier when it was 4.89 percent. Two years ago, in August 2007, the rate was only 3.44 percent.

Here’s a graph from the Mortgages Unzipped blog that shows the delinquency trend over the past few years. It is definitely on the quick rise.

Apparently there is a very high correlation between these recent figures and the rate of consumer bankruptcy filings. Bankruptcy filings rose by 32 percent in the past year according to Reuters.

Rising unemployment numbers are certainly to blame for both of these issues. And we haven’t seen the end of job losses so far. While unemployment rates have not been increasing as fast in the latest months, more jobs are still being cut than are being created. And as people continue to lose jobs, they will continue to be unable to meet their financial obligations.

What does this mean for the rest of the mortgage market? Home prices are likely to stay down across many regional markets until the delinquency rates (and consequently the foreclosure rates) calm down. But the good news is that mortgage interest rates remain near historic lows, so buying and refinancing are still very attractive for those who can qualify.

According to top state officials another wave of foreclosures is about to break across the country, this time in the form of resetting option ARM loans.

“Payment option ARMs are about to explode,” said Iowa Attorney General Tom Miller after the meeting. “That’s the next round of potential foreclosures in our country,” he said.

State Attorney Generals in a meeting Thursday with President Obama’s administration warned that a new round of foreclosures could destabilize the timidly recovering housing market.

Arizona Attorney General Terry Goddard offered raw figures on the plight of his state, saying that there are 128,000 option ARMS poised to reset through 2010, with many of them already starting to reset this month. “It’s the other shoe,” he told Reuters. “I can’t say it’s waiting to drop. It’s dropping now.” He also said that they “threaten a much greater hit to the consumer than the subprimes,” the original shock wave of foreclosures.

What are option ARMs? They are mortgage loans that provide borrowers with extremely low initial teaser rates and give borrowers the option to pay even less than the monthly interest on their loans for a certain period of time. This actually causes the loan balance to increase, creating negative equity or “underwater” loans. Once the interest rates reset, the new payments can be as much as 10 times higher than the initial payment, leaving many people unprepared for the huge jump and often resulting in default and foreclosure.

Here’s a graph from the consumerist.com, courtesy of Credit Suisse, that shows when and how big the option ARM hit will be. It looks like tens of billions of dollars worth of these loans will be resetting over the next two years. And odds are, many of these borrowers will not be able to afford the new, higher payments. Surfs up everybody!

During the first two weeks of September 2009, mortgage interest rates have trended downward and are considerably lower than August’s averages. According to mortgage company Freddie Mac, the average rate on a 30-year fixed rate loan last week, excluding points, was 5.07 percent, down from the average for all of August which was 5.19 percent.

Is the lower trend likely to stick around for the rest of the month? It’s always hard to say, especially because there are two big factors this month that might try to pull rates in opposite directions. First, the Federal Reserve recently announced that the amount of consumer credit across the nation dropped by $21.6 billion in July, and credit availability dropped even more than reported in June. The Fed said that after six straight months of decreasing consumer credit figures, this is the largest decline since the Fed started its survey in 1943. What this means for interest rates is that when consumer credit shrinks fewer people are borrowing money, and there are fewer mortgage backed securities (MBS) for investors to buy. As the price for those increases because of a shriveled supply, it could push mortgage rates down as lenders try to attract more borrowers back to the mortgage table.

The second factor, however, is that the Fed has also announced its plans to stop purchasing U.S. Treasury bonds. It has been buying these up throughout the year to pump more liquidity into the markets, but as the economy has started to show signs of life again, the Fed has decided to back off in hopes that the market is beginning to correct itself. Some predict that this move will cause bond yields to rise and bring mortgage rates with them.

So far, rates have moved lower this month, so maybe the consumer credit issue is the more influential factor right now. Rates are near historic lows right now - so in the long run, they really only have one direction to go and that is up. For those who can qualify for funding, now is a great time for a mortgage loan.

A majority of the nations’ states saw an increase in their existing home sales during the second quarter of this year. Those sales jumps came at the cost of median home price decreases in 129 out of the 155 metropolitan areas monitored by the National Association of Realtors.

Still, this news is very encouraging for the overall housing market, according to Lawrence Yun, NAR chief economist.

“With low interest rates, lower home prices and a first-time buyer tax credit, we’ve been seeing healthy increases in home sales, which are a hopeful sign for the economy,” he said.  “There have been sustained sales gains in Arizona, Nevada and Florida, as well as diverse areas such as Maryland, the District of Columbia and Nebraska.  More recently, we’ve seen strong double-digit gains in Idaho, Utah, New Mexico, Washington, Hawaii, New York, New Jersey, Maine, Vermont, Wisconsin, Indiana, South Dakota and Montana.”

This can only mean good things for the economy as well, Yun said.  “Given the need for related goods and services, each home sale pumps an additional $63,000 into the economy – that’s how the housing engine traditionally pulls us out of recession.  In addition, sales are drawing down inventory and that will help stabilize home values, which in turn will lessen foreclosure pressure and boost credit availability for other sectors of the economy.”

Existing home sales on average were up 3.8 percent during the second quarter to 4.76 million units from 4.58 million homes during the first three months of the year. The national median home price fell to $174,100, a 15.6 percent drop from the second quarter of 2008.

So home prices continue to fall but inventory is down and there is much more movement in the market. A report is due out within the next few weeks about home sales from July and an increase would mean four straight months of sales growth. It’s hard not to feel hopeful after such improvement.

Somehow foreclosures do not seem to be having the same terrible impact on the housing market as they have previously in this recession. Freddie Mac announced today that long term mortgage interest rates rose in the past week. The average rate on a 30-year fixed rate loan grew to 5.29 percent excluding points, up from 5.22 percent the previous week. Both 15-year FRM loan rates and one-year ARM rates also moved upward. Freddie Mac VP and chief economist Frank Nothaft said the increase was due to better than expected employment reports as well as rising home prices in 17 percent of the nation’s major metro areas.

Yet even as the housing and economic picture is starting to look rosier in many respects, in one particular aspect things are only getting worse. Foreclosure filings in July set a new record high with filings jumping up 7 percent from June and up 32 percent from the previous year, according to RealtyTrac Thursday.  That means one in every 355 American home-owning households received some sort of foreclosure notice last month.

“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” James J. Saccacio, RealtyTrac’s chief executive, said in a statement.

“Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”

The current unemployment rate is 9.4 percent and could reach 10 percent in the coming year.
So where is the disconnect? Why are these growing foreclosures not affecting the markets the same way as they did in the previous months. Interest rate movement would suggest that everything is getting better in the housing market. Are these continued foreclosures not going to affect home prices anymore? How can the housing market recover when foreclosures continue to rise? Perhaps next week’s rate will reflect this latest report.