Refi Volume Soars: Who Benefits?

The AP is reporting Mortgage Application Volume Surges on Refinance Volume Growth and Declining Interest Rates.

Mortgage application volume skyrocketed 32.2 percent during the holiday shortened week ending Jan. 4, ending three consecutive weeks of sharp declines, according to the Mortgage Bankers Association's weekly application survey.

The MBA's application index jumped to 706 from 533.9 the previous week, which was also a holiday shortened week because of Christmas. The index can be more volatile around the holidays, as volume tends to be smaller and seasonal adjustments are made. During the same period the previous year, the application index jumped 16.6 percent.

Application volume is still 13 percent less than it was four weeks earlier when it began a run of steady declines. The index stood at 811.8 for the week ending Dec. 7.

Refinance volume increased 53.9 percent during the week ending Jan. 4, while purchase volume jumped 14.7 percent. Refinance applications accounted for 57.7 percent of total applications, compared with 50.9 percent the previous week.

The average interest rate for traditional, 30-year fixed-rate mortgages fell to 5.73 percent from 6.05 percent the previous week. The average interest rate for 15-year fixed-rate mortgages, which are often used to refinance mortgages, dropped to 5.21 percent from 5.61 percent the prior week.

Rates for one-year adjustable rates rose slightly to 6.04 percent from 6 percent.

Curve Watcher's Anonymous is Looking at Mortgage Related Data

LIBOR is back to a normal spread for the first time since June 2007.



That is a positive especially for those in LIBOR based loans.

Yield Curve for January 9th 2008



The 10 year treasury has fallen to 3.80%. That plunge, in combination with an easing in LIBOR means a significant number of people might be able to refinance at attractive rates.

Mortgage Rates Drop



All the above charts courtesy of Bloomberg.

$TNX 10 Year Treasury Weekly Chart



click on chart for sharper image

To accurately compare mortgage rates to a year ago one needs to know where the 10 year note is today and where it was a year ago. The above chart shows the 10-year yield was about 4.65 a year ago vs. 3.80 today. That spread is 85 basis points.

15 year mortgages have only picked up 42 of 85 basis points and 30 year mortgages have only picked up 14 of those basis points. Clearly the market is pricing in increased risk of default. The market is also pricing in additional risk for longer terms.

One year ARMs are actually higher than a year ago. Is there a "forced" march into fixed rates just as it makes sense to hold a variable rate mortgage?

Note that mortgage rates are not exactly comparable to a year ago because down payments are higher, required FICO scores are higher, and fees are higher than a year ago. On a comparable basis rates are higher across the board than a year ago. For borrowers with poor credit or non-conforming loans, rates are substantially higher than a year ago.

Where Are Refis Headed

Looking ahead, expect to see increasing numbers of refis, perhaps substantially so. However, do not expect to see as many refis as when home prices were rising. Refis will be hampered by people being underwater on their mortgages, unemployment rising, and credit card defaults rising. All three of those will have a negative effect on FICO scores at a time when refis are going to require better FICO scores.

Most importantly, those who most need to refinance will not find it so easy, especially if they are upside down on their mortgage or out of a job. Refinance relief and lower mortgage rates are starting to become available, but only for those who least need it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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