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Why the Latest Rate Dip Is Unlikely to Spark Another Refi Wave

MAY 21, 2014 1:10pm ET
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There is very little chance of an impending refinance boomlet, even though rates have fallen to the levels they were at last summer.

The Mortgage Bankers Association's May 21 weekly application survey showed refinancings increased four percentage points from the previous week and comprising 52% of total loan apps.

Mortgage rates have declined in recent weeks because of the situation in Ukraine, which has caused investors to seek the safety of the U.S. Treasury bonds that mortgages are priced from. But it's still won't be enough to cause a large surge in refi applications.

During the MBA's National Secondary Market Conference, its chief economist Michael Fratantoni shot down the notion that there could be a refi boom brewing. Other industry observers agree.

"Rates simply aren't low enough to spark the kind of activity we saw when they were closer to 60-year lows early last May (and late 2012)," says Keith Gumbinger, vice president of HSH.com. HSH.com says rates for the 30-year fixed rate mortgage fell by seven basis points in the past week to 4.2%.

"At present levels and given the gentle decline, the veritable 'window of opportunity' opens just incrementally wider, and so refinance activity can pick up somewhat, which it has," he says.

The market of potential refi borrowers are those who were unable to refi last year, such as consumers with poor credit scores and those whose home values had yet to recover and were not eligible for the Home Affordable Refinance Program.

But the longer that interest rates remain low and property prices continue to increase, these consumers are able to move from the fringes and become able to refi, Gumbinger says.

Michael Lau, the chief executive office at Pingora Asset Management in Denver, says it is too big a challenge for many borrowers to refinance.

"The recent rally will be short-lived and it doesn't seem to be generating much refi activity at all," says Lau.

However, while Bill Banfield, a vice president with Quicken Loans in Detroit, also believes we are not seeing a refi boom or boomlet, he notes many consumers "are getting a second bite at the apple," with the decline in rates that started in the middle of April.

"In the short term, it is noteworthy that people are getting another chance to refinance at what are some very favorable rates," says Banfield.

"There are an enormous amount of people out there that still have interest rates well north of 4.5% or their situation has changed. Maybe are looking to do a cash-out refinancing," he says.

Plus, there are a lot of HARP-eligible borrowers who have not taken advantage of the program yet. "So there is a lot of opportunity out there still," Banfield adds.

The attention paid to the HARP program has died down dramatically and many homeowners are not aware they are eligible, so refinancing "would make a lot of sense," he says.

This is likely to be a short-term phenomenon. Fratantoni predicts rates for the 30-year fixed-rate mortgage will hit 5% by yearend and 5.5% by the end of next year.

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