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Is Boom on Last Legs?

The average mortgage rate remained below 6.5% in early September, still plenty attractive for most borrowers.

But not for people who refinanced or bought a house during most of the past 12 months. In fact, rates remained above 6% for seven consecutive weeks as of mid-September. During the first six months of the year, rates remained below 6%.

And that's slowly putting a damper on refinancing.

In the last week of August, the MBA's refinancing index fell 9% to 1,981. The reading was more than 50% below last year's pace on a four-week rolling average basis, but remains 1.7 times the historical average for refinancing activity, noted analyst Michael Vinciquerra of Raymond James & Associates, St. Petersburg, Fla.

Refinancing activity, measured as a percentage of loan applications, fell below 50% in late August for the first time in almost 15 months.

And even with rates dipping a bit in early September, many economists say that most of the refi boom is probably history.

Freddie Mac predicts that refinancing will still account for 54% of home loans in the third quarter, but then dip to 37% in the fourth. And some of the third-quarter refinancing reflects loan applications that spilled over into July and August from the busy second quarter, when rates hit a four-decade low and 75% of loans were for refinancing.

Freddie Mac senior economist Amy Crews Cutts said that with the spread between rates on adjustable-rate loans and fixed-rate loans getting wider, many borrowers are starting to choose hybrid loans that remain fixed for a period typically ranging from three to 10 years and then convert to one-year adjustables.

But even though Freddie Mac experts think the refi boom "is not dead yet," they expect next year's market to be dominated by home purchase lending.

And Fannie Mae anticipates a similar future. Economists there predict that refinancing will drop to about $400 billion in 2004, compared to around $2.2 trillion this year.

Total originations are likely to fall to about $1.5 trillion next year, or less than half of this year's total, Fannie Mae economist Orawin Velz told MSN.

"Even if mortgage rates don't go up at all, you are going to exhaust the pool," she said.

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