Applications to refinance home-mortgages jumped by a record amount, as borrowers flocked to take advantage of falling mortgage rates -- which were driven down by the government's announcement that it would step in to stabilize the mortgage market.On Wednesday, the Mortgage Bankers Association reported that its index of refinance applications had tripled, the largest increase since the group began tracking this data in 1990.
Applications to purchase homes, which tend to be less sensitive to interest-rate movements, also increased, though by a smaller amount.
The surge in application volume comes as mortgage rates fell by more than 0.50 percentage point. Rates on 30-year fixed-rate conforming mortgages have moved up slightly. They currently average 5.75%, according to HSH Associates in Pompton Plains, N.J., compared with an average of 6.16% just before the government announcement. Raleigh Real Estate, Wilson Real Estate, High Point Real Estate, Gated Community Hillsborough NC and Estate Homes Raleigh markets have seen great sales over the last year.
Rates fell last week after the Federal Reserve announced that it would purchase as much as $600 billion of debt issued or backed by Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan banks.
"The drop in rates seems to have had its desired effect," says Credit Suisse Group mortgage strategist Mahesh Swaminathan. As many as 85% of borrowers with conforming mortgages (those eligible for backing by Fannie Mae and Freddie Mac), now have an incentive to refinance compared with 7% at the start of November, according to a recent analysis by Barclays Capital.
Under a Treasury Department plan in the discussion phase, mortgage behemoths Fannie Mac and Freddie Mac would use their resources to push the rate on a 30-year fixed loan down as far as 4.5% for home purchases.
Even with the recent increase, application volume remains lower than it was as recently as March. Last week's numbers are adjusted for the shortened holiday week, which can make comparisons more difficult.
"The key here is whether these lower rates will be sustained," says Orawin Velz, an associate vice president at the Mortgage Bankers Association, noting that the drop in rates following the government takeover of Fannie Mae and Freddie Mac proved to be short-lived.
If rates remain low, it could be good news for home sales, particularly in markets where falling home prices have boosted affordability, says Thomas Lawler, an independent housing economist.
Mr. Lawler calls the decline in rates "an unabashed positive" for the housing market. But the "bang per buck" isn't likely to be as great as in previous interest-rate cycles since "so many people with a mortgage outstanding will have trouble refinancing because of the valuation of their home or their own credit situation," he adds.
Mortgage lenders say application volume remains strong and some are taking steps to keep it that way. At J.P. Morgan Chase & Co., application volume on Monday and Tuesday was "triple what we had done [on a daily basis] over the previous month," a company spokesman says. At Bank of America Corp., call volume and applications are running one-and-a-half to two times expectations. As rates have declined, the company has begun reaching out to a larger group of borrowers who might benefit from refinancing at lower rates.
Loan officers at SunTrust Banks Inc. have begun calling existing clients to tell them they may benefit from lower rates. Refinances now account for half of applications, up from 30% to 39% before the rate drop, the company says.
At the mortgage unit of Long & Foster Real Estate, based in Fairfax, Va., the number of borrowers who locked in a mortgage rate climbed by 300% in the past 10 days compared with the same period a month earlier, says David Stevens, president of Long & Foster Cos.
Long & Foster is organizing a contest to encourage loan officers to bring in more refinance applications. It also is planning to step up print advertising and use direct mail and phone calls to reach out to former customers who might benefit from a refinance.
How many applications will wind up as actual mortgages remains to be seen. In southeastern Florida, about one-third or less of refinancing applications are leading to loans, says W.D. Acosta, executive vice president for residential lending at Seacoast National Bank, down from as much as 80% two years ago.
"Many of the people who need refinances don't have the equity in their home or ... their job situation isn't what it was when the loan was originated," he says. Nationwide, the "pull through" rate is about 55% for purchase applications and 65% for refinance applications submitted in the first half of this year, according to the Mortgage Bankers Association.
In some cases, borrowers who have good credit may be able to take advantage of lower rates even if they owe more than the value of their home. Fannie Mae, for instance, will let certain borrowers refinance into a new loan with a lower mortgage rate even if their current loan equals as much as 120% of the property's current value.
Glen Lazovick, director of mortgage lending at the Mid-Atlantic Federal Credit Union in Germantown, Md., says refinancing can make sense if you can recover your costs in less than two years.
Borrowers with large loans can save on relatively small interest-rate decreases, Mr. Lazovick says. Borrowers with small mortgages would need to see rates fall by a larger amount to realize meaningful savings.
