With rates nearing last year's lows, Street analysts are starting the refi talk all over again. In recent research, Salomon Smith Barney looked at the different refinancing triggers, and gauged them against the percentage of the market that is now refinanceable.

According to Salomon, only 38% of the market is now in-the-money compared to roughly 90% in early November last year, when rates reached their all-time lows. Using the percentage in-the-money measure, and as of last Wednesday, the bank noted that the refinanceable fraction of the market would likely reach November levels if mortgage rates rally another 60 basis points based on the Salomon Base Mortgage Rate and 40 basis points in terms of the Freddie Mac Survey rate. This event would likely cause "another round of frenzied refinancing activity."

According to analysts that some investors think the Freddie Mac Survey rate has to go down below some round "critical" level to trigger another round of refinancings. This happened in early 1998 and 2001 when mortgage rates dropped below 7%. The logic is that borrowers would likely have refinancing targets that are usually round numbers like 7% or 6.5% and once rates drop below these targets then they rush to refinance. There is also a practical aspect to this: borrowers are requesting lenders to send them automated email notifications, usually when rates are at these rounded thresholds.

Aside from this, mortgage rates hitting a multi-year low can also cause another round of heavy refinancing. Robert Young, an analyst from Salomon, said that in this case, mortgages that have never been "in the money" will become refinanceable.

When rates go to levels not seen before, some borrowers for whom it might not have made sense to refinance in the past may become "in the money." Also, reaching a record historic low in rates can grab media attention raising general borrower awareness about refinancing.

Though some accounts have discounted the notion that the market is nearing another refinancing wave - given the outlook on the Fed and the prospects of an improving economy - other analysts said that a good number of investors are starting to get concerned. Some investors are worried that the mortgage market is fairly rich considering where rates are at.

Also, accounts are acknowledging that if the refi threshold is reached, it would be difficult for mortgage rates to rally one-to-one with Treasurys or swaps. As the massive 6.5 coupon becomes refinanceable, originators would get flooded with supply and will become capacity-constrained. Capacity constraints would be considerably magnified this time around, because coupon concentration is so high.

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