The answer to the first question is simple: yes. Assuming that the points, fees, appraisal, title insurance, overnight delivery, dealer prep, the undercoating package, and all the other mortgage paraphernalia don’t eat up all the savings you might enjoy from the refi, go for it. Rates are being artificially depressed by a national government desperate to get people into homes at rates they can afford. With the $8,000 gift from one’s fellow citizens for first-time home buyers gone, there’s a new present under the tree: a $6,500 gift for anyone buying a principal residence, first-time or hundredth-time.
According to Bankrate's 2008 very helpful closing cost survey, the national average for closing costs on a $200,000 loan is $3,118. The fees in the survey don't include taxes, insurance or prepaid items such as prorated interest or homeowner association dues. (Be forewarned: Some of these unincluded fees and taxes can be daunting. When I bought our current home in 2007, the county in which I live socked me with a $7000 “transfer tax.” Now it didn’t take but 20 or 30 minutes of a county official’s time to rubber-stamp the transfer, meaning they are valuing their time at $14,000-$21,000 an hour. Nice work if you can get it.)
Bankrate.com notes, “When weighing whether to refinance, homeowners typically are urged to consider how many months of lower payments it will take to recoup the closing costs of the new mortgage. For example, if your monthly payment goes down by $156, it would take 20 months of lower payments to recoup the average closing costs.” They provide a nifty calculator on their website to let you enter your costs and loan terms to calculate the months it will take to recoup your costs.
Let’s say, after you get all your actual costs lined up, it still makes sense. Is this a good time to refi? It is quite possibly the last good time to refi before inflation rears its ugly head and rates begin to rise again. Right now, our government is terrified that more residential foreclosures will bring down the Too Big to Fail, Too Stupid to Succeed On Their Own banks. So the Fed is keeping short interest rates artificially depressed at somewhere between 0% and 0.25%. Horrible news if you are a saver; great news if you want to borrow some money. Short rates influence Treasury rates which in turn influence longer-term rates on all debt, including mortgages.
The Fed realizes that there are still home “owners” who only qualified for their loans because they got a NINJA (No Income and No Job or Assets) loan. And they got teaser rates as low as 1% to 4% to get them to sign on the dotted line. The mortgage brokers and banks didn’t really care since they were going to sell the loan immediately to the now-bankrupt (but still kept alive on respirators by continued infusions of taxpayer earnings) Fannie Mae and Freddie Mac. If these folks had to refinance at 6% or 8% or the 10% plus that many of us remember from previous years, there’s no way they’d consider refinancing their mortgages. But with the national average just under 5% for 30-year fixed loans and closer to 4% for 15-year fixed mortgages, the chances are better that they’ll remain in their homes, once burned and twice shy. Millions of these loans are scheduled to reset within the next 12-18 months.
If you are someone who put a reasonable amount down, got a loan you could afford, and are current on your mortgage, the government doesn’t really care about you. That’s not exactly fair – more likely, you aren’t the problem, so they simply take you for granted. The sweetheart rates aren’t intended to entice you – but you aren’t precluded from taking advantage of these low rates, either. Nobody whose job it is to take money from one set of citizens to give it to another set is going to give you $6500 unless you sell the house you’re in and buy another. But you can still get a mortgage with an interest rate that may well reduce your monthly nut and, as inflation increases – it will, Wilma, it will – allow you to repay your lender in ever-less-valuable dollars.
More than 90% of all home loans this year have been purchased by government entities like Fannie Mae, Freddie Mac and the FHA. Then the Fed bought about 80% of these agency mortgage-backed securities. (Congratulations, taxpayer -- you're a landlord!) This maybe-for-the-last-time-in-awhile good deal will last until the Fed stops buying – which could be a year from now or it could be tomorrow. The more good news you see about housing sales and new housing starts, the more likely it is that The Fed and its on-life-support siblings will start to inch rates higher.
As to the second question – even if you aren’t looking to refinance, are there sectors of the economy that might benefit you, as an investor, if there is high refi activity?
Well, sure. The few remaining mortgage brokers should benefit. So should the biggest home mortgage lending banks, although the gains from collecting all those juicy refi fees may be overwhelmed by their losses in other areas, like commercial real estate loans and, for money center banks, loans to such creditworthies as Greece, Dubai, Slovakia, Bangladesh, et al.
According to MortgageDaily.com, the top 10 home mortgage lenders and their 3Q 2009 originations, are:
1. Bank of America (BAC) $98.4 billion
2. Wells Fargo (WFC) $96.0 billion (which has more outstanding mortgages on its books than any other lender)
3. JPMorganChase (JPM) $37.6 billion
4. GMAC $15.4 billion (“We used to sell cars, but now we’re kind of into every money-losing venture we can identify.” -- GM)
5. U.S. Bancorp (USB) $14.8 billion
6. Citigroup ( C ) $14.3 billion
7. SunTrust Banks Inc. (STI) $11.6 billion
8. PHH Mortgage $9.0 billion (a very large subsidiary of publicly-traded PHH Corporation -- PHH)
9. MetLife Inc. (MET) $7.9 billion
10. BB&T Corp. (BBT) $6.9 billion (for those not from The South, that’s the holding company for Branch Bank & Trust.)
Less direct plays might include Farmer Mac (Federal Agricultural Mortgage Corporation -- AGM), Fannie and Freddie’s bunkmate in Intensive Care, which maintains a secondary market for agricultural real estate and rural housing mortgage loans; Ocwen Financial (OCN), which is into all kinds of loans with mortgages just one of those; GE, a company with so many fingers in so many pies that mortgages might easily be lost in the shuffle; and a whole plethora of mortgage REITs that I wouldn’t buy but your research may lead you conclude otherwise.
If you believe that many current “owners” will not be able to qualify for a refi and will seek the refuge of the nicest apartments rather than the travails of another house, you might want to take a look at the quality apartment REITs and real estate vulture-investing funds I wrote far more extensively about in this Editor’s Pick.
Finally, if you foresee discretionary income being increased in US households as a result of lessened monthly payments for those not forced by contract to refi at higher rates, there are a number of sectors that you’ll want to look at. In the economy writ large, it may be a wash between those with less income after refinancing because they've been forced to refi at higher rates, and those with more income after refinancing because, for them, the rate has gone down.
But those with more will be the ones whose mortgages are currently within their means and who have their expenses under control even now, so they are more likely to be able to remodel, helping the DIY businesses like Home Depot (HD), Lowe’s (LOW) and Lumber Liquidators (LL). They may buy more home furnishings and new appliances from the likes of La-Z-Boy (LZB), Ethan Allan (ETH), Whirlpool (WHR), or Electrolux (ELUXY). Ultimately, all retailers benefit if there is more discretionary income, as do mutual fund companies, automakers, asset managers, and others. For our firm’s clients, I wouldn’t touch any of the banks mentioned above. We made good money on their depressed preferred shares earlier this year but, as our firm’s Chief Investment Officer, I have little respect for their managements, common sense or common stocks. (If forced to select one or two of the above, we would consider STI and BBT to be the better of the lot.) And I think it is a wee bit too early to conclude that the DIYs and furniture and appliance makers will benefit directly. For us, the sweet spot is in refinancing our own mortgages and owning the best-managed apartment REITs like Avalon Bay (AVB) and Mid-America Apartment (MAA). Your mileage may vary…
Full Disclosure: We and/or clients for whom it is appropriate are long AVB and MAA.
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but will not do so for 2009. We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!
It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.
