Refi Boom Might Still Have Some Legs

It was supposed to end. The refi boom, that is. Wake me up when it's over.

To be sure, refinancing has tapered off considerably from its peak levels, when as many as three quarters of home loan applications were for refinancing.

Long-term mortgage rates continued to edge downward last week, with rates falling in nine of the 10 most recent weeks leading up to June. The average commitment rate on 30-year fixed-rate mortgages tipped the scale at 5.62% with an average of 0.6 points in the first week of June, according to Freddie Mac.

That's 66 basis points lower than the 30-year rate had been one year earlier, meaning many year-old mortgages could be on the cusp of refinancing.

The average rate on 15-year mortgages was 5.20%, according to the survey.

The Mortgage Bankers Association, which collects weekly data on loan applications, already has shown an increase in the share of loan applications made to refinance an existing loan. And because the MBA's survey week lags one week behind the Freddie Mac data, more increases could be on the way.

According to the MBA survey, refinancing accounted for 41.2% of home loan applications in the week ending May 27, up by almost one percentage point from the week before. That's the highest refinancing share posted since early March.

However, the MBA's seasonally adjusted refinancing index, a measure of total refinancing activity, decreased slightly in the week of May 27 to 2,142, with home purchase lending falling by an even greater amount. And at that level, refinancing still remains way above its "base" level.

But the real question is that of burnout. Are there enough homeowners out there who are able and willing to refinance into a lower rate loan with rates hovering around 5.6%?

The short answer is yes. With refinancing hovering around the 40% mark, that's above historical trends for a post-refi boom environment. But with the average coupon on outstanding mortgages falling to record lows for many of the nation's largest servicers, their portfolios may be less "cuspy" than one would expect with rates this low.

At the end of the first quarter, Countrywide reported that the weighted average coupon on its mortgage servicing portfolio was 5.9%. Washington Mutual reported a WAC of 5.83%.

At today's levels, those kind of portfolios probably won't see a dramatic rise in refinancing for rate and term purposes unless mortgage rates continue to slide. But, even a rate disparity of 20-30 basis points can trigger refinancing, especially among jumbo loan customers and borrowers who might be considering a cash-out or debt consolidation transaction.

In fact, some economists, including Doug Duncan of the Mortgage Bankers Association, believe that the "run rate" of refinancing activity is probably higher today than in the past because of consumers' increasing sophistication about managing their mortgage as part of an overall household finance tool. Many of today's homeowners have been through the refinancing process repeatedly. Technology and underwriting improvements have made it cheaper and easier to close loans. Fewer people than ever before are intimidated by the process.

However, some economists are sticking by their projections that the long-term trend is toward higher interest rates.

"Improvements in the job market and rising wages will likely put upward pressure on mortgage rates in the coming months," said Frank Nothaft, Freddie Mac vice president and chief economist, in a news release. "However, the same growth in income will partially offset any rise in rates, enabling housing to continue to be a healthy industry."

Given the low interest rate conditions, Freddie Mac expects home sales to remain strong for May, he said.

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