Fed easing: How many homeowners will it really help?

The Federal Reserve announced big new steps last week to further push down mortgage interest rates and spur housing. But the vast majority of Americans with mortgages have rates higher than those rock-bottom ones already being offered by the big lenders, indicating that many people are unable to take advantage of the historic drops in loan costs when it could be helping them the most.

Several factors may be keeping homeowners from securing lower mortgage rates, economists said, including battered credit, insufficient income, stricter lending standards and the cost of refinancing. But a major aftershock from the housing crisis itself also remains a big stumbling block: the significant chunk of homeowners who are underwater and unable to get new loans.

Under the stimulus plan announced last week by the Federal Reserve, the central bank will buy $40 billion a month in mortgage-backed securities, with Chairman Ben S. Bernanke saying the intent is to “increase downward pressure on interest rates,” particularly mortgage rates, which should encourage more home sales and refinancing. But economists said those actions are likely to be limited as long as low rates remain out of reach for many homeowners.

“The constraint that is keeping people out of the housing market is absence of equity,” Richard Green, director of the Lusk Center for Real Estate at the University of Southern California, said in an email. “The drop in house prices means that many borrowers are underwater on their houses, and high unemployment has prevented potential first-time buyers from accumulating down payments.”

Roughly 69 percent of American homeowners with mortgages had interest rates above 5 percent at the end of the second quarter and about 32 percent of them had rates above 6 percent, according to detailed mortgage data provided to the Los Angeles Times by CoreLogic. For underwater borrowers, the CoreLogic data showed that 84 percent had loans with interest rates over 5 percent. Half of underwater borrowers had interest rates above 6 percent at the end of the second quarter.

Meanwhile, the average 30-year fixed-rate mortgage has been below 4 percent every week but one this year and the average 15-year fixed-rate mortgage, popular among buyers looking to refinance, has been below 3 percent since the last week in May, according to Freddie Mac’s latest news release on mortgage interest rates.

Economists and policymakers see a big opportunity, arguing that getting underwater borrowers into lower-cost loans would be an effective way of stimulating the economy — freeing up some income for those who are probably struggling the most to pay their mortgages. Refinancing could also help underwater borrowers by allowing them to plow more cash back into their homes and reduce the principals.

The vast majority of borrowers with negative equity, about 84.9 percent, continued to pay their mortgages in the second quarter, CoreLogic reported last week. Nevertheless, underwater properties remain an obstinate barrier to economic growth as people who remain stuck in these homes are often left unable to chase new opportunities elsewhere. These borrowers, with little-to-negative equity, are also higher risks for foreclosure.

Helping spur mass refinancing with new government policies would not only help these households but also get the economy moving again, economists say.

“It has very strong macroeconomic effects,” Columbia University economist Joseph Stiglitz said. “The irony is the people who need the help the most have not been helped — the people who are underwater.”

Changes this year to the Home Affordable Refinance Program for underwater borrowers with Fannie Mae and Freddie Mac loans has lead to a 95 percent increase in participation in the program through the first half of the year.

Stiglitz is supporting legislation by Sen. Jeff Merkeley, D-Ore., that would expand refinancing to borrowers who have privately owned mortgages. Other Senate bills, including one sponsored by Sen. Dianne Feinstein, D-Calif., and another by Barbara Boxer, D-Calif., and Sen. Robert Menendez, D-N.J., are also aimed at expanding refinancing opportunities and reducing costs.

These bills are a priority for the Obama administration, but it’s not clear whether the legislation will go anywhere in a divided Congress less than two months from the presidential election.

While refinancing may be out of reach for many borrowers, the big banks that are originating most of those loans are making big profits from mortgages. The mortgage industry consolidated after the housing bust and the banks left standing are charging higher interest rates than could probably be offered if the market were more competitive, given how low borrowing costs for banks are, experts said.

“The new reality in the mortgage market is that not only is there more demand for mortgages out there, but also the new reality is that lenders are making at least half, if not a third, of the mortgages they made during the mortgage boom,” Guy Cecala, publisher of Inside Mortgage Finance, said. “They need to make more money on each loan.”