Rates Drop Below 6%, But Refis Hardly Surging

Long-term mortgage rates dropped below the psychologically important 6% mark in early January, which raises the specter that servicers may have to manage higher portfolio churning at the same time they are busy trying to cope with a rising default management burden.

Or maybe not, according to some economists.

Recent economic news suggests that lower rates are not a fluke. Several economic indicators suggest a slowing economy, and Federal Reserve Board chairman Ben Bernanke has said that the Federal Reserve Board is prepared "to take substantive additional action" to promote economic growth. That translates into more rate cuts are likely.

The average rate on new 30-year, fixed-rate loans fell to 5.87% in the week ending Jan. 11, according to Freddie Mac's weekly survey. That's the lowest level since September of 2005, a period that coincided with the peak of the housing boom. The average rate on 15-year FRMs fell to 5.43%. In both cases, the average points paid was 0.4 at closing.

The Mortgage Bankers Association's weekly survey of loan applications already is reflecting the impact of lower mortgage rates, with the total volume of home loan applications rising to a four-week high during the first week of January, driven by increases in both home purchase and refinance lending.

The MBA's refinancing index jumped 54% during the week ending Jan. 4, and the refinance share of mortgage applications rose to 58%.

But the MBA also says that refinancing will not pick up as dramatically as it has during previous periods of declining interest rates.

That's because lending standards have been tightened significantly, meaning fewer borrowers will qualify for a new home loan (especially if housing values continue to decline). Secondly, the MBA notes that the spread between conforming mortgage rates and the 10-year Treasury rate has widened, meaning mortgage rates will not come down as much as the 10-year has. The spread between jumbo mortgage rates and conforming mortgage rates has also widened.

As a result, the MBA currently predicts that refinance origination volume will decline this year by 14% to $1 trillion, compared to $1.17 trillion in 2007. The MBA expects refinancing volume to decline further in 2009.

Overall, the MBA expects that economic growth will slow down during the first half of this year, a trend likely to keep long-term mortgage rates low. MBA chief economist Doug Duncan predicts that the 30-year mortgage yield will trend up "modestly" beginning in the second half of this year, ending the year at a still attractive 6.2%. The MBA expects 10-year Treasury rates - a key indicator of where 30-year mortgage rates are headed - to decline in the first half of this year.

Frank Nothaft, Freddie Mac's chief economist, attributed the recent decline in mortgage rates to a weak December jobs report and other indications that the economy is slowing. The National Association of Realtors also reported that pending home sales declined in November, suggesting that seasonally adjusted home sales were probably low in December.

"These weak economic reports renewed concerns about economic conditions in the near future. As a result, mortgage rates came down across the board, with 30-year fixed mortgage rates at their lowest level in more than two years," Mr. Nothaft said in a news release.

So are we headed for a period of lower mortgage rates and lower refinancing activity? It sounds like an oxymoron, but it could happen. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/