I realize it's August, and that's not exactly the hot season for home buying and selling, but I found today's weekly mortgage application report from the Mortgage Bankers Association particularly troubling for a few reasons.

To summarize, refinance applications are way up, up 17 percent, while purchase applications are on life support, down 3.4 percent from the previous week and down nearly 39 percent from a year ago. Refis now make up a full 81.4 percent of all mortgage applications, up from 78.1 percent the previous week, and at their highest level since January of 2009.

With home prices way down and mortgage interest rates hovering near record lows, you would think more buyers would get off the fence and sign a contract, but continued weak consumer sentiment is hold them back. You would also think that the bright side to all this is that all this refinancing is putting more money in the average, struggling American's pocket.

But then I read this note from FBR's Bob Ramsey, who believes the rate on the 30-year fixed could go as low as 4 percent, with the following implications:

"If rates continue to fall, a refi boom could swamp banks and thrifts with cash flows with no obvious place to invest. With newly issued agency MBS yielding approximately 3.5%, banks and thrifts face considerable reinvestment risk."

Thrifts, he says, are better positioned to handle the risk than regional banks, because, "better efficiency provides a significant buffer to weaker revenues."

The less efficient regionals, he says, are most at risk and adds:

"Further, if rates remain low for an extended period, we would expect an increase in bank M&A activity as challenging prospects convince some to sell, and others choose to consolidate and grow earnings by cutting duplicative costs."

I had thought that most borrowers who could had already refinanced by now, but he says that, for some unknown reason, is not the case.  "We believe approximately half of conforming borrowers have both the economic incentive and equity to refinance."

It seems that in today's housing finance market, for every upside, there is a downside.

Questions?  Comments?