Rising Rates Scare Borrowers Into Action
After falling dramatically for more than a month, applications for mortgage refinances finally swung to the positive last week, rising 5 percent from the previous week, despite the continued rise in mortgage rates, according to the Mortgage Bankers Association.
The average rate on the 30-year fixed rose from 4.07 percent to 4.15 percent. Refinance activity, however, is still 36 percent below where it was at the start of May.
"The airways were filled last week and the week before with news of the Armageddon in mortgage rates," said Mark Hanson, a California-based mortgage and housing analyst. "A motivator for the few fence-sitters that do exist."
Hanson also pointed to "hungry loan officers getting beaten up by their managers" after refinance activity volume crashing down. That ramped up proactive marketing of their client base, especially as rates began leveling last week. Hanson still believes the lower trend in refinances is firmly in place. Only the mortgage industry could turn that around.
"A big issue is that historically tough underwriting has significantly limited the pool of borrowers eligible to refinance," noted Guy Cecala of Inside Mortgage Finance. "The mortgage industry could theoretically 'extend' the refi boom by loosening underwriting and/or encouraging cash-out refinancing—something it has done in the past during periods of rising interest rates. But that doesn't appear to be happening, at least not now."
As rates continue to rise, fewer borrowers will be interested in refinancing because the math will not put them ahead. Refinance volume has been high over the past two years, with rates hovering near or at record lows.
Roughly 10 million refinances took place over the past two years, although that may include borrowers who have refinanced more than once, according to Inside Mortgage Finance. From mid-2011 to mid-2012, rates dropped by 100 basis points, making it worthwhile for some to refinance more than once.In addition to low rates, the government's refinance program, called HARP, for underwater borrowers with Fannie Mae and Freddie Mac loans, helped juice refinances as well.
In the first three months of this year, there were nearly 1.4 million refinances on Fannie Mae and Freddie Mac mortgages alone, according to the Federal Housing Finance Agency. Of those, 22 percent were through HARP, which was recently extended through 2015. More than 2.4 million borrowers so far have taken advantage of that program.
For borrowers who don't have government-backed loans and therefore don't qualify for that program, rising home prices have helped allow more of them to qualify for refinances. Among borrowers, 850,000 rose above water on their mortgages, moving into a positive equity position in the first three months of this year, according to a new report from CoreLogic. While nearly 10 million are still underwater, the more that rise above, the more refinances can happen.
"We are still far below peak home price levels, but tight supplies in many areas coupled with continued demand for single family homes should help us close the gap," said Anand Nallathambi, the CEO of CoreLogic.
Rising prices, however, are a double-edged sword, especially in a rising interest rate environment. Potential buyers are losing purchasing power every day, just as demand is surging.
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