Wednesday, October 13, 2010

Refinance Activity and Mortgage Rates

by Bill McBride on 10/13/2010 10:05:00 AM

Report the MBA reported on the increase in refinance activity:

The Refinance Index increased 21.0 percent from the previous week.
...
“Refinance application volumes are now close to the highest level this year." [said Michael Fratantoni, MBA’s Vice President of Research and Economics].
Mortgage rates and refinance activity Click on graph for larger image in new window.

This graph shows the MBA's refinance index (monthly average) 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 an increase in refinance activity. The peak this year was in late August, although the most recent week was close.

However the level of activity is still well below the previous refinance booms in 2009 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.

With 30 year mortgage rates more than 0.5% below the lows of 2009, we might see another surge in refinance activity (the average contract interest rate for 30-year fixed-rate mortgages last week was at 4.21% according to the MBA). According to the NY Fed's Brian Sack, lowering longer-term borrowing costs for many households is one of the key transmission mechanisms that the Fed is targeting with QE2.