Wednesday, August 18, 2010

Refinance Activity, Mortgage Rates and Effective Rate

by Bill McBride on 8/18/2010 01:11:00 PM

The MBA reported this morning on the surge in refinance activity:

The Refinance Index increased 17.1 percent from the previous week and was the highest Refinance Index observed in the survey since the week ending May 15, 2009. ... The refinance share of mortgage activity increased to 81.4 percent of total applications from 78.1 percent the previous week, which is the highest refinance share observed since January 2009.
Mortgage rates and refinance activity Click on graph for larger image in new window.

The first graph shows the MBA's refinance index (monthly) and the the 30 year fixed rate mortgage interest rate and one year ARM rate, from the Freddie Mac Primary Mortgage Market Survey®.

As mortgage rates have fallen, there has been a surge in refinance activity. But it is still well below the activity during the 2009 refinance boom, or in 2002/2003. It takes lower and lower rates to get people to refi - and many borrowers have insufficient equity (or negative equity) or inadequate income to refi.

30 year mortgage rates and effective rate on outstanding mortgage debt The second graph shows the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.

The red line is a quarterly estimate from the BEA of the effective rate of interest on all outstanding mortgages (Owner- and Tenant-occupied residential housing through Q2 2010).

The effective rate on outstanding mortgages is at a series low of just over 6%, but the rate is moving down slowly since so many borrowers can't refinance because they do not qualify (either because the property value is too low or their incomes are insufficient).

Because of the difference between current mortgage rates and the effective rate, many people are pushing for programs to help unqualified borrowers to refinance. As an example, PIMCO's Bill Gross suggested
Mr. Gross said the U.S. could easily refinance every current mortgage borrower, who is paying a rate above 5%, with a loan backed by Fannie Mae, Freddie Mac, and the Federal Housing Administration, returning tens of billions in savings.
This will not happen unless the private lenders write down the principal - and that is very unlikely.

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