Applications to refinance home mortgages surge

Homeowners rushed to take advantage of last week's drop in interest rates following the government's takeover of Fannie Mae and Freddie Mac, but rates are rising again on investor fears about the eroding conditions in financial markets.

A mini-refinance boom started last Thursday but ended early Monday, said Pava Leyrer, president of Heritage National Mortgage in Michigan. The average rate on a 30-year, fixed rate mortgage was 6.14 percent on Wednesday, up from 6.02 percent last week after the government bailed out Fannie and Freddie, though still below last month's 6.65 percent, according to HSH Associates.

"We've had three rate changes in an afternoon and not for the good either," Leyrer said Wednesday.

She said the investors aren't happy with the Federal Reserve's decision Tuesday not to cut a key interest rate in the face of recent market chaos. The central bank kept the federal funds rate unchanged at 2 percent even after the demise of Lehman Brothers, the forced sale of Merrill Lynch, and steep declines in the stock markets.

Last week, applications by homeowners looking to refinance their mortgages spiked 88 percent, according to the Mortgage Bankers Association. Refinances accounted for nearly 52 percent of all application activity, up from 36 percent the previous week, the trade group said.

The volume of purchase applications also edged up last week by 5 percent.

But while the number of applications soared last week, the approval rates will likely be low because appraisals for many homes are coming in close to or below the amount of the existing mortgages.

"A lot of applications won't end up in closing because the value is no longer there," Ritch Workman, co-owner of Workman Mortgage in Melbourne, Fla.

Even if a homeowner has 10 to 15 percent equity in a house, he or she will have to pay for private mortgage insurance, which will probably eclipse any savings from a refinance, Workman said.

Nationwide home prices dropped a record 15.4 in the second quarter, according to Standard & Poor's/Case-Shiller's U.S. National Home Price Index. In many once-hot markets like Las Vegas, Los Angeles and Miami prices have fallen 25 percent or more, making it nearly impossible to refinance into a more manageable home loan.

Leroy Hernandez, 51, who lives outside of Richmond, Va., said he has been unable to get help with his $235,000 loan and is two months behind on the subprime mortgage he took out two years ago. Hernandez used to own three houses — two of which he purchased as investment properties, but turned one back over to the lender, sold another and faces foreclosure on the property where he lives.

Hernandez said he's contacted several banks seeking to refinance his current loan, but they refused to consider his application.

"I'm just so discouraged," he said.

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AP Business Writer Alan Zibel in Washington contributed to this report.

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