Ralph Cramden used to exclaim "To the Moon!" in periods of exasperation or frustration on the Honeymooners in days gone by. To those who remember, that was about the last time interest rates on mortgages were as low as they are right now. Chances are that you are not a mortgage banker if you have time to read this right now as the low rates have touched off another phase of refinancing that has led volumes "To the Moon".

The MBA Weekly Application Survey was established in late 1989 with an index level of 100 the week of March 16, 1990 as the reference point for activity level. The week ending November 2, 2001 the refinancing index stood at 5223. What does that mean? Roughly, it means refinancing applications were being placed at a rate 52 times that of January 1990. It means that the dollar volume of refinance loans in 2001 (estimated at over $960 billion) will exceed total originations in 1990 ($458 billion). In fact, refinance volume in 2001 will be greater than total originations in all but four years since the beginning of the 1990s.

The refinancing activity is generated by interest-rate declines to be sure, but in this boom it is aided and abetted by the home price appreciation that has occurred since 1995 - 30% approximately. This price appreciation has meant equity buildup for the typical homeowner. The same homeowner now has some experience (or friends or relatives with the experience) in the refinance process and that process has become somewhat more efficient. Thus, the average homeowner has become more sophisticated regarding the use of their home's position on their balance sheet.

In 2001 it appears that more than 50% of those refinancing have been taking out equity in the process. The total amount of equity taken out may be near $30,000 per loan although data are incomplete. In the event it is taken out, what are the homeowners doing with it? It seems that as much as 50% of it is going back into the economy as consumption in some form. That means that a conservative estimate is that cash-out refis may be adding $50 billion to consumer spending which would be 0.5% as a boost to GDP growth during 2001.

Has September 11th changed any of the refinancing metrics? It has lowered interest rates to 6.5% for a 30-year fixed-rate loan and 6% for a 15-year loan. This launched the rocket to the moon in light of the equity buildup. Note that the only week since the 1960s that mortgage rates were lower was in October 1998 in the presence of the Asian debt crisis, which promoted a flight to quality in the U.S. Treasury market and dragged mortgage rates down as well. While much of the information on the Argentine debt crisis has been in the market for some time, the memory of Asia in 1998 has no doubt been sharpened in recent days and added to demand for U.S. Treasuries, thus helping push down rates.

Goodbye to the 30-year

Speaking of U.S. Treasuries, has the decision to stop issuing the 30-year bond had an impact on mortgage rates? Again, the bond market has known for some time that the supply was dwindling and that the possibility existed that the 30-year bond would be eliminated. There was in fact a scarcity premium in the yield already. However, the surprise timing and nature of the announcement has had a slight downward impact on rates, at least in the short run, as investors had to decide to go up the risk spectrum at the long end or move down the maturity spectrum to the 10 year Treasury.

What about the purchase index? It stood at 310 the week ending September 7th before falling to 264 the week ending October 19th. This was not a great surprise as home sales had been trending down even prior to the events of September 11th. The weakening economy and rising unemployment were slowing sales. However, the survey for the week ending November 2nd shows a jump in purchase applications to 318. The low interest rates have arguably slowed the decline in sales. A 6.5% mortgage rate has brought into the market some borrowers who couldn't afford the loan at 7% but whose jobs were secure.

The peak for the purchase index was 344 the week ending June 1, 2001. Prior to the terrorist attack we were heading for a record year for new home sales and possibly existing home sales as well. It is now unlikely we will achieve records in either of those categories but it will nonetheless be a very good year for both. Our forecast for sales the fourth quarter is about a 10% decline over the prior quarter which, adjusted for seasonal effects is still strong in light of the economy's health.

Outlook for 2002

Looking ahead, the rate environment is likely to let the refi boom continue through the end of the year. We expect rates to remain at current levels until economic activity starts to pick up at the outset of 2002. The second half of 2002 we see rates in the 7.2% range for 30-year fixed-rate mortgages. This will choke off a lot of the refinance activity but will still be excellent for sales. The numbers for originations will definitely reveal an all time record for 2001 of over $1.9 trillion in loan production, more than half will be refinances.

As the economy picks up some steam and unemployment falls, the sales market will show its strength again and 2002 should be a good year, maybe only to the upper atmosphere, not the moon.

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