A few days ago I commented on the recent “refinancing rush” which has/is taking place due to the recently lowered interest rates.  I would have no problem arguing that there is no “rush” as a 3% rise really isn’t a “rush”.

Anyway.. Here is the proof…

(Sources – Bloomberg and Ritholtz.com)

Here is the important question that everyone needs to be asking – if the housing market continues to fall, what can the government do to stop it?  

The belief has always been that lowering interest rates will spur buying, and in turn, property values stabilize.  Since it appears common market  principles are no applying, what is to say this will work?  

The only option, and it would have helped significantly if this was done in the first place, is to buy the toxic mortgages…

Checking the news stories this morning, I found this little gem:  A refinancing rush as interest rates come down

It’s time for me to call semi-bullsh*t here.  Let’s take a look at some of the specifics behind this flood of new refinances.

Homeowners across the country did the same Wednesday. Mortgage brokers reported a surge of calls from borrowers seeking to take advantage of the Fed’s extraordinary decision. Some brokers were quoting mortgage rates of close to 4.5 percent for people with strong credit and hefty down payments. 

(Emphasis add)

A strong credit record, especially in the market, is considered to be over 700.  Unfortunalty the average credit score in the United States is 693.  If you do not fall above this number, good luck at getting a refinance.  Even if you do, you may be out of luck.  Look at that second item – hefty down payments.

A number of lenders are requiring up to 10% down for a refinance.  Others may be able to work with borrowers for less but a higher interest rate.    However, let’s take a worst case situation and assume that there is little equity, that means a large number of people who wish to refinance need to be sitting on a stack of cash.  If you have a 100K mortgage, and the lender requires 10% down to refi, that means a person may need roughly 10K simply to lower their mortgage.

Now what about the people who have lost equity in their house, how will the “refi” boom help these individuals?  If your house value is down roughly 20% and you have little to no equity, you will not be able to refi UNLESS you have that large stack of cash we just spoke of.

Finally, people – and banks – have not learned from the current situation we are in.  

Lisa Wallwork, 37, and her husband, Shawn, are in the process of refinancing the mortgage on the house they’ve owned for five years in Tolland, Conn. They pulled it off the market in September after their house didn’t sell for more than a year.

 

“We wanted to move up to a bigger and better house,” she said.

 

Instead, the couple are refinancing their $185,000 mortgage, pulling out equity to remodel their kitchen and getting a new front door. And they still expect to save up to $300 a month in the process.

(Emphasis add)

What does this remind you of?  People using their homes as credit cards once again.  Pull out equity in order to have cash while increasing your debt.  This is part of what caused the current economic downturn we are facing.

It is critical to question all data that is in the press these days.  Yes, there will be an increase in mortgage related activity but only a small portion of the population will be eligible to reap the benefits. Having 3 requests in one day (making the number up) may seem like a boom if you previously had zero.

This wave of refi’s is helping to establish a new floor in housing prices, true, but there is so much pain in the market that floor may still be years away.

The start of the “credit crisis” is often linked to the subprime mortgage lending industry.  So, mortgages that required little or no money down, mortgages issued to individuals with insufficient income, or mortgages issued to people with troubled credit histories all fall into the category of subprime.

From the “it didn’t take a genius” to see it coming department, now the prime mortgage market is watching the default rate on once “safe” mortgages climb dramatically.  How dramatic, one may ask?  Nationally, 3.07% of prime mortgages were in foreclosure or at least 60 days late in the second quarter of 2008.  That number may not seem that significant until one realizes the highest default rate had previously been set at 1.97% back in 1985.

A very important point to notice in the paragraph above – Nationally.   Depending on what part of the country one is in, the default rate on prime mortgages could jump at high as 4.15%.   Areas with severely depressed real estate markets, where prices have dropped upwards of 30%, are at higher risk for prime mortgage defaults.

While the press may have temporarily chanced focus, I believe the credit crisis is going to get a lot uglier.

Update: Just thought I would point out, the subprime mortgage default rate in August was at 43% nationally.

With the Lehman bankruptcy filing it was a foregone conclusion that the stock market was going to be hammered today. The DOW opened down almost 300 points – Energy, Basic Materials, Conglomerates and Financial were hit the hardest.

This is a sell due to Lehman along with falling oil and weakness in the dollar, but what a sell off it is. Just focusing in the Investment Services sector for a second, look at where stocks sit as of right now (11AM ET)

Lehman Brothers (LEH) – 0.20 – down 94.4%
AIG (AIG) – down 42%
Bank of America (BAC) - down 15.23%
UBS AG (UBS) – 17.83 – down 13.44%
Morgan Stanley (MS) – 34.16 – down 8.25%

AIG is in the downward spiral Lehman was facing, all this because of exposure to bad debt with real estate. Based on reports in the media AIG is searching hard for funding and may not be able to avoid a liquidity crisis.

One has to ask where will the pain end? Ironically, the answer seems to be when the housing market stabilizes. It’s funny the investment instrument that helped create the current situation may be the thing that can put a stop to this mess. The only issue is that it may be a long time off…