The financial turmoil in Europe is providing an unexpected windfall for American home buyers, as international money seeking a safe haven is flowing into the U.S., pushing domestic mortgage rates to the lowest levels of the year and back near 50-year lows.

Getty ImagesA real estate agent leaves an open house for a home for sale in San Francisco. Falling mortgage rates could lift the U.S. housing market.

The housing industry had been bracing for months for a period of rising mortgage rates, triggered by the end of the Federal Reserve’s $1.25 trillion mortgage-securities purchase program. Conventional wisdom held that mortgage rates would rise as the Fed pulled back from propping up the market.

Instead, many in the industry now say rates could drift as low as 4.5% this summer from 4.86% now, instead of rising to 6% as some economists projected, making for significantly lower payments for Americans buying homes or refinancing their mortgages.

Refinance business “exploded” last week, says Jeff Lazerson, chief executive of Mortgage Grader, a brokerage in Laguna Niguel, Calif. “It’s schizophrenic. We all had this expectation of higher interest rates and no more refinances.” He says he helped a borrower lock in a 30-year loan with a 4.25% fixed rate last week, the lowest in his 24 years in the business.

Rates on 30-year mortgages averaged 4.84% last week, according to a survey by mortgage-insurance titan Freddie Mac. Rates were quoted late Friday at 4.86%, the lowest since December 2009, according to a survey by financial publisher HSH Associates, and down from a high of 5.27% for the week ended April 9. Rates on 15-year mortgages averaged 4.24% last week—the lowest since Freddie began its survey in 1991.

Economists largely attribute the decline in mortgage rates to the European debt crisis and new concerns about the global economy, which unleashed a massive wave of cash into U.S. bonds from investors around the world.

This buying pushed down yields on Treasury bonds. Because mortgage rates are closely pegged to yields on 10-year Treasury notes, which fell to 3.2% Friday, the decline in Treasurys pulled down mortgage yields. Typically, mortgage yields remain around 1.5 percentage points above yields on 10-year Treasury notes.

Falling mortgage rates can give a powerful lift to the housing market. A general rule of thumb holds that every one percentage point decline in mortgage rates is the equivalent of roughly a 10% reduction in the home price for the buyer. So, if the current rates hold, say economists, that could help stabilize prices and allow current homeowners to sell existing homes without substantial price cuts.

It isn’t clear how much home-buying the lower rates will spur. Demand had fallen in recent weeks after buyers raced to close sales ahead of last month’s expiration of an $8,000 federal tax credit for home purchases. Applications for new-purchase loans hit a 13-year low in the week ending May 14, according to the Mortgage Bankers Association.

Borrowers do face roadblocks. Underwriting standards are their strictest in a decade, and record numbers of borrowers are “underwater,” owing more to the bank than their homes are worth. That has excluded large swaths of borrowers from getting loans at the new lower rates.

Still, lower rates could widen the pool of people who qualify for a mortgage, while others may find they qualify for a slightly larger loan. “They can buy the place with the extra bedroom or the swimming pool,” says Jay Brinkmann, chief economist at the Mortgage Bankers Association.

Falling rates have encouraged some Americans to consider refinancing their existing mortgages to save money. A one-percentage-point decline in mortgage rates can cut $250 off the monthly payment on a $400,000 30-year fixed-rate mortgage, giving consumers cash they can use to spend.

Richard Hunsinger plans to refinance two loans on his Potomac, Md., home into a new 15-year mortgage this week with a 4.37% rate. The 55-year-old dentist is worried that interest rates will eventually rise sharply, boosting the payment on his home-equity line of credit. His first mortgage, also a 15-year loan, currently has a fixed rate of 5.25%. And while the rate on his $240,000 home-equity loan is just 3.25%, it has risen as high as 8% in the past.

Rates “can’t stay low forever,” says Dr. Hunsinger. If they go up over the next year, “this will look like a really bright decision.”

By historical standards, rates are incredibly low. Until 2003, rates on 30-year fixed-rate loans hadn’t dipped below 5% since the 1960s. Rates fell to similar points throughout much of the past year as the government was helping to hold down costs for borrowers.

Nearly half of all borrowers with 30-year conforming fixed-rate mortgages have mortgage rates of 5.75% or higher and could reduce their rates by a full percentage point if they refinanced at current rates, according to investment bank Credit Suisse.

Many of those borrowers may have tried to refinance last year, only to find that they couldn’t qualify. When rates fell to similar lows in 2003, refinance activity hit a record $2.9 trillion, compared to $1.2 trillion last year, according to Inside Mortgage Finance, a trade publication.

Now, more private investors are coming into the market for loans, offering better prices for securities containing mortgages with low rates than they were one year ago. That could lead banks and brokers to cut upfront origination fees, and borrowers who are able to refinance could find it cheaper to do so than last year.

“I’m calling people back and saying, ‘Now it’s worth it,’” says Michael Menatian, a mortgage banker in West Hartford, Conn.

WSJ.com

By NICK TIMIRAOS

—Prabha Natarajan contributed to this article

One day in June 2005, a housing economist I was interviewing said he was starting to worry about large numbers of homeowners finding themselves “underwater.”

“What’s that?” I asked. It was a new term to me. At that time, Americans were practically drunk on housing, buying up real estate as fast as they could, and few voices, especially those in the industry, were willing to spoil the party by suggesting that a hangover was on the horizon.

Maybe you prefer the term “upside down” to underwater, but in either case, it means that you owe more on your mortgage than the house is worth.

Today, though, we seem to be sadly acquainted with the concept, according to a new survey by Harris Interactive, which claims that nearly one-fourth of all people who hold mortgages on their homes think they’re underwater.

That’s more than 27 million people, the pollster said.

And they’re worried, the poll reported. Among those who claimed underwater status, 42 percent say they’re “very concerned,” and another 38 percent are “somewhat concerned” about not having enough income to cover their costs.

All of this was announced at about the same time that the federal government said it was ramping up its Home Affordable Modification Program, or HAMP, to help some underwater borrowers. Participating lenders may now receive incentives to reduce the principal on loans that are more than 115 percent of the current value of the property, though that life preserver may be tossed too late to help some. The Treasury Department has said it might not have the incentive program fully operational until this fall — if it happens on a broad scale at all.

This week, representatives of the major banks appeared before Congress to talk about the voluntary program and expressed some strong reservations, even though many industry observers had earlier gauged the lenders to be onboard with the HAMP plan. David Lowman of JPMorgan Chase said the estimated $700 billion to $900 billion cost of principal forgiveness would have to be paid for somewhere, and it probably would be priced into the cost of future mortgage lending.

Then there’s the simmering-anger issue: U.S. Rep. Jeb Hensarling, R-Texas, wondered during the hearings about the fairness of it.

“It’s a policy that says to the citizens who work hard, who live within their means, who save for a rainy day, ‘You are a sucker.’ When you’re struggling to pay your own mortgage, you shouldn’t be forced to pay your neighbors’ as well,” he said.

The Washington report

The National Association of Realtors recently disclosed it spent $5.6 million lobbying the federal government in the fourth quarter of 2009.

That spending was about one-third more than the $4.2 million spent in the third quarter by the trade group, which is headquartered in Chicago.

Trading spaces, sort of

On the same day this month, two real estate sites separately announced they were going into each other’s territory. A popular site for listings of homes for sale announced it would expand into listings of rentals. And a popular site for finding vacation homes for rent announced it had created a marketplace for listings of vacation properties for sale.

The switches reflect a couple of realities in today’s market. Trulia.com, in announcing that in addition to homes for sale it would also offer search features for rentals, explained that it believes that Americans these days could go either way — buy or rent — and the company wants to accommodate.

Trulia might be right: Another rentals site, Apartments.com (which is partly owned by Tribune Co., which owns the Chicago Tribune), says it saw “unprecedented growth” early this year, with a spike in traffic to the site and in follow-through calls to landlords. The rental business has struggled mightily in this recession, but it’s not hard to picture more would-be homeowners deciding to stay on the sidelines as renters now.

And HomeAway.com, which dominates the vacation-rental market online, unveiled HomeAwayRealEstate.com on the same day. The company, based in Austin, Texas, cites National Association of Realtors data suggesting the market for second homes is recovering. That may well be true, but it’s also true that today’s economic realities have turned that once-beloved getaway home into a drain on the wallet for many people who are simultaneously trying to rent it and sell it.

In either case, see “underwater,” above.

Mary Umberger

An underwater world for many homeowners — chicagotribune.com

After four months of gains, home prices flattened in October. Worse yet, industry insiders think that they’ll soon start to fall.

Prices have risen more than 3% since May, according to S&P/Case-Shiller.

But most forecasts predict price declines in 2010, with possible losses ranging from anywhere from 3% on up. Fiserv Lending Solutions, a financial analytics firm, forecasts that prices will fall in all but 39 of the 381 markets it covers, with an average drop of 11.3%.

“We’ve seen recent price stabilization because of low mortgage interest rates and the impact of the first-time homebuyers tax credit,” said Pat Newport of IHS Global Research. “But there are really good reasons to think prices will now start going down.”

There are three main reasons for the reversal: a coming flood of foreclosures, rising interest rates and the eventual end of the tax credits.

For Gus Faucher, the director of macroeconomics for Moody’s Economy.com, the huge number of foreclosures that remain in the pipeline is the big problem.

Moody’s upped its estimate of defaults recently because of shortcomings of the government-led mortgage modification programs. Trial workouts are not being made permanent and completed modifications are re-defaulting at high rates.

“There are going to be fewer [successful] modifications than we thought,” said Faucher.

Even so, he added, much of the price decline has already occurred and Moody’s forecast is for only another 8% drop. The worst-hit markets will be the ones suffering the most foreclosures, places like Arizona, California, Florida and Nevada.

Resetting option ARMs (adjustable rate mortgages) will also aggravate the foreclosure problem. These mortgages allow borrowers to pick their own payments, which can be so low they don’t even cover the interest. Balances swell.

For many of the more than 350,000 option-ARM borrowers, it’s time to pay the piper. Their loans will change into fully amortizing mortgages that will carry much higher monthly payments. A very large percentage of these homeowners will default, according to Shari Olefson, author of “Foreclosure Nation: Mortgaging the American Dream.”

“We’ve still only seen the tip of the foreclosure iceberg,” she said.

She also predicts more strategic defaults, people deliberately walking away from even fixed-rate mortgages as the value of their homes dips well below the amount they owe.

Olefson’s forecast is for price declines of 5% to 15%, depending on the area, with a national median price drop of about 10% for 2010.

Also affecting prices will be higher interest rates. Some analysts, according to Newport, think rates for a 30-year mortgage will pass 6% next year as the government curtails housing market support.

The Federal Reserve has helped keep rates low through purchases of mortgage-backed securities. But that program is winding down and will end in March.

“The government is throwing everything at the market but the kitchen sink,” said Peter Schiff, president of Euro pacific Capital. “It can’t prop up housing markets forever.”

Schiff is among the bigger bears. Though he gave no specific prediction, he thinks prices — already down 29% from the peak — are only halfway to the bottom.

As a tool for supporting housing markets and prices, the tax credit for homebuyers is a two-edged sword. It reduces taxes dollar-for-dollar by up to $8,000 for new homebuyers and $6,500 for buyers who already own a home and should support home prices. But it ends at the end of April.

Many buyers will push their deals forward to get in before the deadline and then demand for homes could sink afterward.

One of the few bulls out there is NAR, whose chief economist, Lawrence Yun, is counting on the tax credit to provide temporary support for housing markets until the economy recovers enough to start fueling sales. He predicts price improvement in 2010 of more than 3%.

“The headwind we face is rising mortgage interest rates,” Yun said, “but the compensating factors will be the homebuyers tax credit in the first half of the year and increased job creation in the second half.”

NEW YORK (CNNMoney.com)

Hocking the house for quick cash is a lot harder than it used to be, and it’s causing headaches for homeowners, banks and the economy.

During the housing boom, millions of people borrowed against the value of their homes to remodel kitchens, finish basements, pay off credit cards, buy TVs or cars, and finance educations. Banks encouraged the borrowing, touting in ads how easy it is to unlock the cash in their homes to “live richly” and “seize your someday.”

Now, the days of tapping your house for easy money have gone the way of soaring home prices. A quarter of all homeowners are ineligible for home equity loans because they owe more on their mortgage than what the house is worth. Those who have equity in their homes are finding banks far more stingy. Many with home-equity loans are seeing their credit limits reduced dramatically.

The sharp pullback is dragging on the economy, household budgets and banks’ books. And it’s another sign that the consumer spending binge that powered the economy through most of the decade is unlikely to return anytime soon.

At the peak of the housing boom in 2006, banks made $430 billion in home equity loans and lines of credit, according to the trade publication Inside Mortgage Finance. From 2002 to 2006, such lending was equal to 2.8 percent of the nation’s economic activity, according to a study by finance professors Atif Mian and Amir Sufi of the University of Chicago.

For the first nine months of 2009, only $40 billion in new home equity loans were made. The impact on the economy: close to zero.

“The home as ATM is yesterday,” says Keith Gumbinger, vice president of HSH Associates Financial Publishers, which publishes consumer loan information.

Millions of homeowners borrowed from the house to improve their standard of living. Now, unable to count on rising home values to absorb more borrowing, indebted homeowners are feeling anything but wealthy.

Holly Scribner, 34, and her husband took out a $20,000 home equity loan in mid-2007 — just as the housing market began its swoon. They used the money to replace sinks and faucets, paint, buy a snow blower and make other improvements to their home in Nashua, N.H.

The $200 monthly payment was easy until property taxes jumped $200 a month, the basement flooded (causing $20,000 in damage) and the family ran into other financial difficulties as the recession took hold. Their home’s value fell from $279,000 to $180,000. They could no longer afford to make payments on either their first $200,000 mortgage or the home equity loan.

Scribner, who is a stay-at-home mom with three children, avoided foreclosure by striking a deal with the first mortgage lender, HSBC, which agreed to modify their loan and reduce payments from $1,900 a month to $1,100 a month. The home equity lender, Ditech, refused to negotiate. Scribner’s husband, Scott, works at an auto loan financing company but is looking for a second job to supplement the family’s income.

The family is still having trouble making regular payments on the home-equity loan. The latest was for $100 in November.

“It was a huge mess. I ruined my credit,” Holly Scribner says. “We did everything right, we thought, and we ended up in a bad situation.”

It’s a mess for the banking industry, too.

Home equity lending gained popularity after 1986, the year Congress eliminated the tax deduction for interest on credit card debt but preserved deductions on interest for home equity loans and lines of credit. Homeowners realized it was easier or cheaper to tap their home equity for cash than to use money taken from savings accounts, mutual funds or personal loans to fund home improvements.

Banks made plenty of money issuing these loans. Home equity borrowers pay many of the costs associated with buying a home. They also may have to pay annual membership fees, account maintenance fees and transaction fees each time a credit line is tapped.

In 1990, the overall outstanding balance on home equity loans was $215 billion. In 2007, it peaked at $1.13 trillion. For the first nine months of 2009, it’s at $1.05 trillion, the Federal Reserve said. Today, there are more than 20 million outstanding home equity loans and lines of credit, according to First American CoreLogic.

But delinquencies are rising, hitting record highs in the second quarter. About 4 percent of home equity loans were delinquent, and nearly 2 percent of credit lines were 30 days or more overdue, according to the most recent data available from the American Bankers Association.

A rise in home-equity defaults can be particularly painful for a bank. That’s because the primary mortgage lender is first in line to get repaid after the home is sold through foreclosure. Often, the home-equity lender is left with little or nothing.

Banks are applying the brakes.

Bank of America, for example made about $10.4 billion in home equity loans in the first nine months of the year — down 70 percent from the same period last year, spokesman Rick Simon says. The also started sending letters freezing or cutting lines of credit last year, and will disqualify borrowers in areas where home prices are declining.

“This was just solid risk management,” he says.

Jeffrey Yellin is in the middle of remodeling his kitchen, dining room, living room and garage at his home in Oak Park, Calif. He planned to pay for the project with his $200,000 home equity line of credit, which he took out in January 2007 when his house was valued at $750,000.

In October, his lender, Wells Fargo, sent a letter informing him that his credit line was being cut to $110,000 because his home’s value had fallen by $168,000, according to the bank.

He is suing the bank, alleging it used unfair standards to justify its reduction, incorrectly assessed the property value, failed to inform customers promptly and used an appeals process that is “oppressive.” Jay Edelson, a lawyer in Chicago who is representing Yellin, says homeowners are increasingly challenging such letters in court. He says he’s received 500 calls from upset borrowers.

Wells Fargo declined to comment on Yellin’s lawsuit but said it reviews of customers’ home equity lines of credit to make sure that account limits are in line with the borrowers’ ability to repay and the value of their homes.

“We do sometimes change our decisions when the customer provides sufficient additional information,” Wells Fargo spokeswoman Mary Berg said in a statement e-mailed to The Associated Press.

Work has stopped at the Yellin’s home. The backyard, used as a staging area for the remodeling job, is packed with materials and equipment.

“Now, I’ve got a backyard that looks like ‘Sanford and Son’ almost,” he says.

ADRIAN SAINZ

AP Real Estate Writer

It’s not the first time an apartment has been anointed the smallest in Manhattan in some category, but this one might really be it. Two people and two cats live in this 175-square-foot studio on 110th Street, which the Post labels the smallest legal apartment in the city. Zaarath and Christopher Prokop, both accountants, bought the pad — roughly the width of a subway car, plus a three-foot-wide bathroom — three months ago for $150,000, or about $857 per square foot. (Monthly maintenance: just over $700.) They make it work by filling their home with…practically nothing at all: a queen-size bed, a flat-screen TV, a leather storage bench, and a shelf/wine rack. They don’t cook, so they use their kitchen cabinets for clothes instead of food. They jog to work in running gear and pick up their officewear at various dry cleaners along the way. When the couple pays off the mortgage in two years, they plan to remodel the space with a Murphy bed and larger windows. Easiest way to make a shoebox feel like a townhouse!

· Cozy-crazy couple makes tight all right in the city’s tiniest studio [NYP]

by Sara Curbed.com