Low interest rates are provoking a refinancing boom, as they always do. The trouble is, it is such a quiet boom many people are not hearing it.
In ordinary times, rates as low as they are currently (4.44% recently for 30-year fixed-rate mortgages and 3.92% for 15 years) would be sparking a boom that would lift the industry, if not to the nearly $4 trillion level of 2005, than at least to above $2.5 trillion (factoring out the subprime demand of that boom year).
Still, refis are currently tracking at nearly 80% of all mortgage business, certainly a boom level if taken on its own account. And the Federal Reserve's recent decision to use proceeds of mortgage securities to buy Treasuries should, in a roundabout way, move rates down even more or, at least, keep them steady.
Buying Treasuries will increase demand and price, thus dropping yields. Mortgages are usually priced in tandem with similar maturities of Treasuries, so any drop in Treasuries should mean a drop in mortgage rates.
And anybody who says rates are so low they can't go any lower should pay attention to rates on deposits, which continue to spiral down to about 1% on certificates of deposit. If they fall further lenders that use deposits to fund mortgages will be able to make a profit on a 4% mortgage.
Of course, these are not ordinary times. Home sales are down, home prices are down or just leveling after extended down periods, credit remains tight, consumer demand is still down, and there appears to be little appetite in Washington for effective stimulus of the economy, such as bringing back the tax credit for first time home buyers.
Traditionally, it is the purchase market that has provided the stability in the mortgage business. It could be counted on to stay stable or rise, as it did for decades. Refi booms came and went, but the purchase market could be counted on for a steady source of business.
This year, though, it lies dormant, and the only thing that is keeping the mortgage business afloat is the refi spigot.
That, of course, could vanish, if rates were to head upward. Luckily, there seems no sign of a jump in rates. That's good news for originators, and also servicers, whose borrowers would be even more stressed if rates rose.
