MELISSA BLOCK, Host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.
MICHELE NORRIS, Host:
And I'm Michele Norris.
The Federal Reserve's decision this week to cut a key interest rate was designed to help jolt the sagging economy. It remains to be seen just how well - or how quickly - it will work.
But there was an immediate burst of activity in the mortgage market. Across the country, mortgage brokers reported a deluge of calls from people wondering whether it was a good time to refinance.
Russell Rothstein is one of the people who was fielding those calls. He's the director of mortgage lending for Beacon Mortgage in Rockville, Maryland. He joins me now in the studio.
Welcome to the program.
BLOCK: Thank you for having me.
NORRIS: Could you help us understand the link between a drop at the Fed and how that actually affects the mortgage market?
BLOCK: Well, what the Fed did was they cut short-term interest rates; short-term interest rates affect prime lending, monthly adjustables, and it trickles up to long-term interest rates. But it is not a direct effect always. The mortgage industry and the bond market has taken into consideration that the Fed was going to be cutting rates at half percent hopefully next week. They were surprised by a three-quarter percent drop in the rates. The bond market reacted very positively to it originally. And the rates actually did go down.
And we saw rates on Tuesday drop from around 5-7/8 percent to around 5-3/8 percent, but then once the market settled down, we actually saw mortgage rates settle back up into the 5-3/4 to 5-7/8 range in the past day.
NORRIS: So there was a small window there of a few days where it actually sounded like it was a good time to refinance.
BLOCK: Well, that's correct. It's still a good time to refinance. What people have to look at is there is no one specific good time; they've got to look at their individual situation. Maybe they thought they were going to be in their home for three to five years and now with the values of houses having come down some, they're going to end up staying in their house longer and they want the security of a fixed-rate mortgage.
NORRIS: Is there any clear category of homeowner, a person that should not refinance?
BLOCK: I think you have to look at how long you're going to be in the home for. If you're looking to sell your home, you know, in the next year or two, you have to look and see if economically it make sense because there are cost involved in it.
So if your payments are going to go down, but the amount that you're going to save is not going to recoup the cost of the refinance, that's where you have to do a break-even analysis. On the other side, if you have an adjustable that's coming up for renewal right now, even if you're only going to be there for two years - it depends how high your rate could go to - then you look at the difference in payments.
NORRIS: For people who are caught up in the subprime problems - they're carrying a mortgage that has a value that's actually larger than the value of their home, is it possible for them to refinance now? Was this good news for that homeowner?
BLOCK: It's going to be very tough for them because if you're upside-down on your mortgage, meaning, your mortgage is worth more than the value of your home, most lenders are not going to refinance you. Your best option at that point is to go back to the existing lender that is servicing the loan for you and explain to them your situation. They are trying to do workouts. They don't want to foreclose; they don't want your property. What they want to do is they want their payments, and maybe you can restructure your loan. With rates having dropped down, it is possible that they may do a loan modification for you and change the terms of it, so that you could afford to stay in your home. You know, everyone thinks that the big, bad lenders want to come and take their homes. The lenders don't want the homes. The lenders want you to be able to make your payments.
NORRIS: So what if you're not in what you call one of these upside-down situations where the home value is more than the worth of the mortgage but you just found that once the arm hit, once the mortgage payments increase significantly that you just weren't able to make those payments? What about that homeowner?
BLOCK: There are people out there who took adjustable-rate mortgages where the rate is adjusting to higher than what a fixed-rate mortgage is today. So that's an opportunity to either go back to their current lender or to check what's out there in the marketplace. It's very competitive today between lenders. And it's important to check who has the best rates, but not only the best rate, because the best rate doesn't always mean the best mortgage. You have to make sure the terms and the closing costs - the entire package - makes sense for you.
NORRIS: Was there some expectation or perhaps even disappointment that the rate cut was not steeper, that there wasn't a bigger rate cut?
BLOCK: From what I have been told, this is the biggest rate cut that they've seen at one time since the 1980s. So it was a surprise, and we're expecting a half percent next week. And I think the industry is still expecting a half-percent cut, so I think the mortgage rates will settle down and there's a good chance that they can come back down further. And I think when people look at these rates, at some point they've just got to make a decision. You're never going to find the bottom of the market. At some point, you just have to decide this is where it makes sense for me, and you have to at that point, you know, move forward.
NORRIS: Russell, thank you so much for coming in to talk to us. I'm going now to let you get back on the road and get back to work.
BLOCK: Thank you.
NORRIS: Thank you very much.
Russell Rothstein is the director of mortgage lending for Beacon Mortgage that's at Rockville, Maryland.