In a mortgage-backed market filled with uncertainty, there appears to be at least one growing consensus among market participants: This year could see a significant uptick in refinancing.
The potential for a refinancing wave hinges on the fact that the 30-year conventional mortgage rate has dropped below 6% for the first time since 2005. Coupled with the fact that the Mortgage Bankers Association's (MBA) Jan. 23 Refinance Index was up 16.9% to 4178.2 from 3575.5 the previous week, conditions appear to be ripe for a flood of refinancing.
Art Frank, director and head of MBS research at Deutsche Bank Securities, noted last Wednesday that the Refinance Index is the highest it's been since early 2004. "Even before this rally (last week) I would have to say yes, we're entering a refi wave," he said. "Having said that, I don't think it's going to be quite as big as 2003 or early 2004 because the housing market is significantly weaker now. This means that some people have negative or essentially no equity in their home."
Borrowers with good credit and a decent level of equity should be able to refinance without any problems, he said.
Jay Brinkmann, vice president of research and economics for the MBA, noted in a statement last week that refinance applications are up 92% since the beginning of November and purchase applications have risen 7%. "With tighter credit conditions we do not know how many of theses applications will become loans, but it is clear that borrowers are responding to the 40 to 80 basis point drop in rates we have seen since Nov. 2 across products," he said.
According to the MBA's Jan. 23 report, the refinance share of mortgage activity climbed to 66% of total applications from 62.7% the previous week. In addition, the average contract interest rate for 30-year fixed-rate mortgages dipped to 5.49% from 5.62% the previous week.
Kevin Cavin, an analyst for FTN Financial, agreed that falling rates are creating an environment for a surge in refinancing but, like Frank, does not believe it will be as big as in years past. "Back in 2003, we had the mother of all refi waves and the majority of outstanding mortgages at that time had loan rates that were significantly higher than what you see today," he said. "There aren't as many mortgages outstanding today that are eligible for refinancing like they were in 2003."
Cavin also highlighted the tightened credit lending standards as a clear sign that the mortgage origination environment is a lot different today than it was in 2003. From 2003 until 2006, he said, "anyone could walk into a lending institution and get a loan and that's why you have the subprime problem today."
"The average LTV has increased so as borrowers become more leveraged, they are almost pricing themselves out of refi opportunities, especially if home prices continue to decline," he added.
In a Jan. 14 research report, Bear Stearns analysts noted that the refinancing activity has been limited to conventional conforming loans because the rates on jumbo loans still hover well above 6% and Alt-A and subprime borrowers will have difficulty qualifying under current agency refinancing guidelines.
Other market conditions that could limit the refinancing surge, according to Bear Stearns, are the increased costs of refinancing, the lack of equity for many borrowers and the diminished role of brokers since the subprime fallout.
Cavin said that unless the $417,000 conforming loan limits for Fannie Mae and Freddie Mac are lifted, he also believes the refinance activity will be limited to conforming agency loans.
Although there has not been an indication that this will happen anytime soon, "A lot of politicians would like to see (the limits lifted) because that would be one way to legislate an improvement in the credit situation to homeowners," Cavin said.
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