Refis Continue to Surge Early in the New Year

At the beginning of 2002, the conventional wisdom was that rates would gradually rise and refinance volume would taper off as the year progressed.

At the start of 2003, the forecast is much the same - but this time economists are hedging their bets a bit. They acknowledge that it is possible that the refinancing boom, already two years old, may still have some steam left in it.

But the threshold for cutting off the refi boom may be lower than ever before as well. Freddie Mac estimates that 25% of outstanding mortgages refinanced last year, when rates dropped to record lows on a number of occasions.

But Freddie Mac economists Frank Nothaft and Amy Crews Cutts said in a recent economic commentary that they expect refinancing to decline later this year. In fact, a rise in mortgage rates to just 6.25% on 30-year loans could spell the end of the refi boom later this year.

Other housing finance economists largely agree that refinance volume will likely taper off over the course of 2003. Fannie Mae projects that refinancing will account for 70% of home loan applications in the first quarter of this year, but Fannie Mae's economists expect that share to fall to 32% by the fourth quarter. They expect the average 30-year mortgage rate to rise from an estimated 6.18% in the first quarter to an estimated 6.46% in the fourth quarter of this year.

That's right, with rates below 6.50%, refinancing still may fall to less than a third of loan originations, according to Fannie Mae. That would illustrate the effect of burnout, as most who can and want to refinance have apparently done so.

The Mortgage Bankers Association of America sees the year unfolding in much the same way. The MBA forecast anticipates refinancing accounting for 65% of loan originations in the first quarter, declining to just 25% in the fourth.

The MBA expects the contract rate on 30-year home loans to rise to 6.8% by the end of this year, anticipating a strengthening economy.

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