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Refi Volume Edges Up as Rates Sink

Sure, the focus remains on credit risk. And because of tighter underwriting standards, refinancing rates have slowed down for most portfolios.

But if you think interest rate risk was a thing of the past, think again. The early portion of 2008 has proven to be a period of declining rates, leaving many of the loans in the typical mortgage servicing portfolio "cuspy." That is, borrowers are on the cusp of having a strong incentive to refinance their home loan to improve the rate and terms.

At the end of January, the average 30-year mortgage rate came in at 5.68%, according to Freddie Mac. Rates had remained in the sub-6% arena for four straight weeks, a feat that hadn't occurred since 2005. That means just about any conforming, conventional loan originated over the past two years is likely to carry a note rate that is in the range of 50 basis points higher than today's rates.

Moreover, plenty of adjustable-rate mortgage borrowers are facing resets that will likely increase their mortgage rate over the "teaser" they paid during the initial fixed period. Those borrowers also - credit quality and equity permitting - will be tempted to trade in their old loan for a new, fixed-rate product.

Sure, people who locked into a 30-year conforming home loan from 2003 through 2005 and have stayed put aren't likely to be calling their mortgage lender yet, but there are plenty of other people who are. The MBA's weekly compilation of loan application data has shown that refinancing accounted for more than half of mortgage applications.

In fact, in the last full week of January, the MBA's weekly survey showed refinancing rising to account for 73% of total loan applications, up from 66% the week before. That's firmly in refi boom territory, by historical standards, though a weak housing market has tamped down home purchase activity, which helps push the refinance share up. But even looking at the MBA's refinance index, which measures absolute refinancing activity relative to a historic base level, shows that refinancing volume has reached a high level. The refinance index rose 22% in the last week of January.

And a relatively flat yield curve is luring consumers into fixed-rate loan products. The average rate on new one-year ARMs was only about 50 basis points lower than the 30-year FRM in late January.

So far, economic data seem to augur a continuation of low long-term interest rates. Weak employment, home construction, industrial production and retail sales data in recent weeks have all added to recession fears. That spurred the Federal Reserve Board's decision to cut its fed funds rate dramatically in January.

Still, most economists do not expect to see a huge surge in refinancing volume. Fannie Mae economists in mid-January projected that refinancing originations totaled $1.2 trillion in 2007. They also project that refi volume will rise only modestly to $1.3 trillion this year, fueled in part by ARM borrowers taking advantage of the opportunity to switch into less risky FRM loans.

Until financial firms report first-quarter data, we won't know what impact the recent slip in rates has had on their servicing portfolios. But one can guess that anyone who isn't effectively hedged could face some impairment when it comes time to report first-quarter 2008 results.

Snapshot: Average 30-Year Mortgage Rate

January 2008 5.76%

All of 2007 6.34%

All of 2006 6.41%

All of 2005 5.87% (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/