Dropping mortgage rates near levels that could lead to more refis

Falling mortgage rates have reached the point where they are spurring speculation about a possible resurgence in refinancing, according to an FTN Financial report.

The significant decline in the 10-year Treasury yield from its mid-November highs "has obvious implications for the potential for increased refi activity," mortgage researchers Walter Schmidt, Tim Robinson and Alexis Vilimas noted in the report.

But while mortgage rates are down from November highs, they have fallen more gradually than bond market yields, and haven't yet reached a level that would make it compelling for many borrowers to refinance, the researchers added.

That said, if the spread between mortgage rates and bond yields narrows and rates drops further, it could eventually reach the point where it exposes a new group of 30-year mortgages to refinancing incentives.

At 4.55%, the average 30-year mortgage rate has fallen by nearly 0.5% since it approached highs near 5% in mid-November, according to Freddie Mac's weekly mortgage survey. Mortgage rates were above 4.5% for much of the past year, and above 4.75% for about two months during the fall.

Even if a small group of recently-originated mortgages was to be exposed to refinancing incentives, it could be helpful to lenders contending with declining originations.

Refi activity has fallen by almost 40% over the past few years, as compared to a 15% drop in home loan application activity overall, according to a recent analysis of Mortgage Bankers Association data by secondary market advisory firm Mortgage Capital Trading.

"Lenders depending on refi activity have been particularly hard-hit," Bill Berliner, MCT's director of analytics, noted in the report.