Mortgage Refinancing Applications Grow: Home Buyers Still Cautious
According to the Mortgage Banker’s Association, refinancing applications grew 9.3 percent for the week ending September. The following week, applications dropped to 4.3 percent. Over a four-week period, the mortgage application Market Index moving average has a seasonally adjusted rate of 2.44 percent. Most of the positive trending evident in the Market Index consists of the Refinance Index — 3.24 percent. The other component of the Market Index, — Purchase Index, has a four-week moving average of 0.33 percent.
The numbers clearly show that pushing mortgage rates even lower has spearheaded somewhat of resurgence in mortgage refinancing over the four-week period. In fact, many lenders do not have the staff necessary to keep up with the demand. The layoff of thousands of workers, — after mortgage rates moved up from November to February — has caused a shortage of staff for processing refinancing applications. According to the Bureau of Labor Statistics, 1,500 workers in the mortgage and non-mortgage brokers segment of the housing market lost their jobs in September.
The mortgage refinancing backlog has resulted in increase waits to schedule the real estate closing – from 30 to 60 days. More stringent underwriting criteria and disclosure requirements have also contributed to slower mortgage application processing. Because of the nature of the work, it difficult for companies to hire temporary staffing or outsource the work to third parties.
Interest Rates Fall Below Four Percent
Mortgage interest rate fell below four percent to their lowest rate ever — 3.94 percent, according to Freddie Mac. One of the most common refinancing choices for homeowners, the 15-year fixed-rate mortgages, reached its lowest rate in history at 3.26 percent. Even in the 1950s, the lowest rates dropped to was 4.01 percent.
Long-term mortgage interest rates depend on the movement of the 10-year and 30-year Treasury. A drop in the treasury yield means a decline in mortgage interest rates. Conversely, a rise in yields equates to an increase in mortgage rates.
The Federal Reserve Board’s new policy of re-balancing its portfolio, to sell shorter-term that come due and purchase long-term Treasuries and mortgage bonds, also puts downward pressure on mortgage interest rates.
Consumer Confidence the Key
The refinancing explosion represents good news in an industry woefully short of positive reports lately. When homeowners refinance to low interest rate mortgages, most spend the money they save in interest to buy other goods and services. For example, a homeowner who has a $275,000 outstanding mortgage with an interest rate of 5.19 percent saves almost $2,500 a year, by refinancing to a 3.94 percent mortgage rate.
At this point, most homebuyers with solid employment and a strong financial base will probably have refinanced their homes already. According to some housing industry analysts, it would take another full percentage drop in rates to make it financially beneficial for these people to refinance to take advantage of the lower rates.
Consumer confidence continues to wane, exacerbated by high unemployment. In times of uncertainty about the future, stagnant income, and burden by heavy debt, people become less likely to take the plunge to buy a new home. The tough credit standards, and higher down payment requirements — some lenders requiring a 20 percent down payment, have also stifled refinancing and home buying activities.
The difficult economy has taken its toll in the form of damage credit scores, difficulty saving money for down payments and 22 percent of homeowners with underwater mortgages. The expected onslaught of home buying, because of historic low interest rates, has not materialized. These factors prohibit many homeowners from refinancing or purchasing a home.
Another factor keeping many perspective homebuyers on the sideline has been the possibility of homes losing even more value. In some areas of the country, such as Las Vegas and Phoenix, home prices have fallen more than 50 percent off peak prices reached in June 2006.
This concern may have some validity. In August, foreclosure filings rose, despite year-to-year foreclosure filing numbers declining. A new round of real estate owned by banks (REO) hitting the market increases inventories, which has a negative affect on home values.
