As Mortgage Refinancings Surge, Banks Struggle

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Barely two weeks into a new government program that allows severely underwater borrowerswith loans backed by Fannie Mae and Freddie Mac to refinance their loans to lower rates, the numbers are surging.

Applications to refinance jumped 9.4 percent last week, seasonally adjusted, according to the Mortgage Bankers Association. Record low interest rates on the thirty-year fixed, averaging 4.05 percent, are only adding fuel to the fire.

“There was a lot of pent up demand,” said Bank of America spokesman Terry Francisco of the recently revamped Home Affordable Refinance Program(HARP 2). The newest incarnation removes the cap on negative equity, so borrowers who owe more than 125 percent of their home’s current value can now qualify. These so-called severely underwater borrowers, however, must be current on their payments.

The new surge backed up the phone lines at Bank of America, with some borrowers reporting they heard a message suggesting they call back in six to nine months. Francisco confirms the lender has temporarily stopped taking applications for cash-out refinances because of the additional underwriting those loans require. Cash-out accounts for 10-15 percent of their mortgage business.

“We’re taking a lot of applications for HARP 2 and straight refi’s as well, so we needed to curb our demand in some way,” Francisco said.

Wells Fargo also reports an increase in refinancing right after the holidays, as well as an overall increase in 2011. “From January of last year through January of this year, Wells Fargo has seen its refinancing volume more than double,” says a spokesman, who adds that it’s too early to tell about the impact of HARP 2, as record low interest rates are a key factor in demand. Wells Fargo, however, has not suspended any of its lending.

The refinance share of mortgage activity is now 80.5 percent of total applications.

Applications for mortgages to purchase a home were flat last week and have been basically flat now for a month, which is not a promising sign for home sales. President Obama last week announced yet another government refinance program to help underwater borrowers who do not have Fannie or Freddie-backed loans. The plan could cost $5-10 billion and requires Congressional approval; some have called it dead on arrival.

Strong refinance activity means more money in consumers’ pockets and potentially more debt reduction, as some borrowers opt for fixed-rate amortizing loans as opposed to interest-only adjustable rate mortgages. Unfortunately, the flip side, which is lower applications to purchase a home, does not bode well for housing’s fledgling recover. “The latest weakness of mortgage applications for home purchase may suggest that the recent improvement in home sales is not built on solid foundations,” says Paul Diggle of Capital Economics.

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