By

POSTED: Wednesday, December 17, 2008

A refinancing and mortgage-lending boom is expected in Hawaii after the Federal Reserve cut interest rates yesterday to an all-time low.

Mortgage lenders' phones continued to ring off the hook yesterday as the Fed lowered the key interest rate that banks charge each other to between zero and 0.25 percent — a move that is expected to create a chain reaction among lenders.

“;We're getting a flood of phone calls, no question about it,”; said John Ratkovich, president of American Home Finance, from his Chicago home office. “;It influences everything in a positive way by getting money to circulate.”;

The flurry of phone calls actually started two weeks ago when rates fell below 6 percent.

“;Every mortgage company in the business has done more loans or received more phone calls in the past two weeks than they've received in the previous 11 months,”; he said.

The market anticipated the move by the federal government weeks before it actually happened, which earlier drove rates down. However, the problem isn't the rates, but the unprecedented tightening of credit that is holding up the circulation of dollars.

“;The slightest error on your credit report, say a $50 medical bill, is now treated like a catastrophe,”; Ratkovich said.

While rates on adjustable-rate mortgages based on the U.S. Treasury Index have immediately fallen, the rates for long-term fixed loans are expected to come down over the next few weeks, said Harvey Shapiro, research economist at the Honolulu Board of Realtors.

“;The question is going to be whether (yesterday's) rate cut is enough to kick-start lenders into lending,”; he said. “;They have the funds now from the government and are supposed to be lending them, but lenders have been skittish and money's not going out the door.”;

Nonetheless, as rates decline, the amount of income one needs to qualify is lowered, which means more people can qualify for loans, Shapiro added.

Wells Fargo Home Mortgage has seen a substantial increase in applications since the rates fell just before Thanksgiving and loan applications this month are anticipated to quadruple October's numbers, according to area manager Marie Imanaka.

In addition, some mortgage-lending circles anticipate rates breaking the 4 percent barrier, said Steve Teruya, president and chief operating officer of Finance Factors Ltd. The average adjustable mortgage rate on a 30-year fixed loan is 5 percent with zero points.

Earlier in the year, Rusty Rasmussen, a mortgage broker at Castle & Cooke Mortgage, caught a lot of flak from his industry when he predicted that mortgage rates would fall to 5 percent by year's end.

“;They all said I was crazy,”; Rasmussen said. “;But look at it now.”;

Rasmussen said he already was seeing a pickup in refinancing and mortgage activity around Thanksgiving, but that now the activity is unprecedented.

“;We're getting 30 calls a day or more,”; he said. “;We used to get about five calls a day.”;

When mortgage rates fell to 4.5 percent and 2 points late yesterday after the Fed approved another rate cut, Rasmussen said he felt like he was watching history in the making.

“;The mortgage industry has officially entered into uncharted territory,”; he said.

While only about half of those inquiring likely will be able to take advantage of the new low rates, Rasmussen said, there are still options in the marketplace for those who have reduced equity or low credit scores, although those alternatives aren't open to investors.

While the federal government has pledged to keep rates low for a while, it would be prudent for homeowners to jump on the bandwagon now to refinance high mortgages or risk the market changing course, according to finance experts.

“;Just after World War II we started with the 5 percent type of loans, so for the 50 years it has taken to get all the way back down there, it probably won't go any lower,”; Ratkovich said. “;If you're waiting, the probabilities are greater that you will miss the boat.”;

Homeowners' heaven

There is a $546 spread between home loans taken out in August and now. In late August, homeowners taking out loans were looking at paying two points for a 6.25 percent interest rate. Yesterday afternoon, interest rates dropped to a historical low of 4.5 percent with 2 points down.

Here's how interest-rate fluctuations impact payments for the purchase or refinance of a $500,000 single-family home loan:

                                                                                                                                                                                       

Period	Interest rate (bought with 2 points)	Payment
August 2008	6.25 percent	$3,079
January 2008	5.25 percent	$2,761
June 2003*	4.875 percent	$2,646
Yesterday**	4.5 percent	$2,533

* previous low

** historic low

Source: Rusty Rasmussen, Castle & Cooke Mortgage