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A Permanent Refi Boom?

With mortgage rates at a four-decade low, it's little wonder that refinancing continued to account for about three-quarters of loan applications.

But at least one economist believes that even when interest rates start to rise, lenders may be surprised to see how heavy the refinancing business remains.

Even without a rate incentive, refinancing accounts for an estimated 23%-25% of the loan market as homeowners change loan products or tap into their equity, according to Douglas Duncan, chief economist of the Mortgage Bankers Association of America.

He believes that this kind of "strategic" refinancing is on the rise. Consumers are learning to adjust their mortgage debt amount and product type to manage their financial portfolio.

At the MBA National Mortgage Servicing Conference here,

Mr. Duncan said that the mortgage industry eventually will see "burnout," a point at which most borrowers who can refinance will have done so. But he reminded lenders that not all refinancing is motivated by payment reductions.

Increasingly, borrowers are taking cash out of their homes to finance things like education and home improvements. And the myriad of new loan products that have been created in recent years also give borrowers options to manage their personal finances differently, he noted.

In addition, the cost of taking out a new loan has declined in recent years as well.

"Essentially, the upfront cost to refinance is about zero," Mr. Duncan said.

As a result, he estimates that the normal "run rate" of refinancing now accounts for between 23% and 25% of loan applications - even without an interest rate reduction scenario.

That's up from about 15% to 18% in the late 1980s and early 1990s, before the refinancing boom of 1993 began an evolution that made consumers more savvy about refinancing their loans.

"This is not your parents mortgage market," Mr. Duncan said.

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