Realty Check

Refi Surge...Not So Much

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As mortgage rates hit new record lows, refinance applications have surged accordingly. That, as always, is leading economists to talk once again about what the effect of all that refinancing might be on the greater economy.

It's even bringing up an old proposal by Columbia University's Christopher Meyer to have the government blanket refinance all loans backed by Fannie Mae and Freddie Mac.

I participated in a conversation with him this week on NPR's "On Point," where he argued this idea could pump billions of dollars of spending back into the economy.

I'm not going to debate Meyer's proposal here; it's already been done. I do think we have to take a look at the refinance picture in today's market, since we all know that today's economic reality is not usual.

First, let's look at the value of refis.

It's around $1 trillion in mortgage debt annually, in normal times. If you assume an average savings of one percentage point in the refi, then you get about $10 billion in savings (including average fees). But we have to remember that many borrowers are not qualifying for refis now because they are underwater on their mortgages (owe more than the homes are worth). Fannie and Freddie have programs for underwater borrowers to refi, but they have strict standards to meet. This from Dean Baker at the Center for Economic and Policy Research:

"To get some rough numbers, we have around 12 million underwater mortgages. Probably around 4-5 million are with Fannie and Freddie. Assuming an average value of 200k, that gets you $800 billion to $1 trillion in debt. If we assume that by easing the rules we get half of these people to refi (probably way high) and the average saving is 1.5 pp, this saves between $6-7.5 billion a year in interest. It's something, but it's not going to be some huge stimulus."

Even for those not underwater, most already refinanced last year, and some argue, due to that, mortgage rates have to go far lower than 4 percent to make a second refinance worthwhile.

And there's more. This from mortgage expert Mark Hanson.

"Although refi's will undoubtedly rise sharply from the recent lows for an unknown duration on this plunge in rates, there are many drags this time around that will diminish the effects of the plunge in Treasury Bond yields especially into Q4.

  • mortgage rates have to drop further each refi-boomlet to get the same impact;
  • there are fewer homeowners in aggregate that can benefit or are able to refi this time around;
  • banks don't want portfolio run-off and may not pass the full benefit onto the borrowers / banks won't wan to increase risk in order to drive new portfolio loan volume.
  • and the QM/QRM rules and GSE/FHA loan amount reductions on tap will reduce the number of eligible borrowers even further.

Hanson cites similar lows in the 30 year fixed back in October of 2010, which he refers to as the Jackson Hole refi boomlet, referring to when the Federal Reserve governors met for their annual meeting and rolled out QE2 (quantitative easing). In order to surpass that volume, he contends, rates would have to fall 50 basis points below that, or about 75 basis points from now, to spur comparable volume.

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