Though Freddie Mac's survey rate has been staying at the 6.8% level in recent weeks - the survey consistently reported a below-7% average mortgage rate for 30-year fixed rates in February - the level of refinancing activity has not seen a corresponding level of increase.

This fact was highlighted in a recent Countrywide Securities report. In this report, analysts said, "The overall drop in interest rates, combined with the great performance of mortgages over the last month, has pushed mortgage rates to levels not seen since last fall."

However, they added that the drop in interest rates "has not been fully reflected in refinancing activity as measured in the refinancing Indices." This is supported by the fact that a regression analysis of the conventional refi index versus Freddie's survey rate suggests that the Refi Index is on the low side.

According to analysts, the index reported at 2090 for the week ending Feb. 15. However, the "fitted value" of the index with a Freddie survey rate of 6.86% is 2834, which is approximately 35% higher.

Reasons for the imbalance

There are several reasons why a corresponding drop in the Refi Index has not happened.

The report stated that despite the most recent dip in mortgage rates, they have not yet breached the lows experienced last fall. Given the incentives available, many borrowers inclined to refinance their loans have already done so. Those who have not refinanced are probably less sensitive to refi incentives because of factors such as the reduced awareness of opportunities that are available.

Countrywide also said that while the amount of in-the-money loans is still quite considerable, the outstanding amount of loans with refinancing incentives is much lower than it was in the fall, given the level of rates. They estimated that the Freddie Mac survey rate would need to drop into the area of 6.45-6.50% to have as many loans in-the-money as there were in October of 2001, when the survey rate averaged 6.62%.

Media effect

Finally, with the recent lowering of rates not accompanied by Fed rate cuts - which Countrywide analysts have called "the most significant media event for the consumer mortgage market" - this has diminished the extent of recent refinancing activity.

"Fed rate cuts are like Pavlov ringing the bell for his dog," said Bill Berliner, an analyst at Countrywide. "Fed cuts tend to translate into activity whether or not mortgage rates are actually falling. Without that being a driver for refi activity, this has muted the explosiveness of the refi effect given the level of rates."

However, the report points out that while refi activity is not as heavy as it was last fall, activity remains robust. They point out that the four-week moving average of the composite refi index, which was 1927 for the week ending 2/15, is higher than it was for the period between the middle of May and the end of August. They wrote, "our point is that while refinancing activity remains at a high level, it is somewhat lower than it has been in the recent past, given the level of rates."

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