Bye-Bye Refi?

August 16th, 2013 at 12:36 pm

After wiggling around in the 1.5% to 2% range over the past year, the yield on the 10-year Treasury bond is now in the mid-twos and higher, closing at 2.7% today.  There are numerous reasons for this, including the specter of the Federal Reserve beginning to taper its asset purchases next month, a possibility that markets viewed as boosted when unemployment insurance claims hit a six-year low on Thursday.

Monetary stimulus lasts not forever, the Fed should be expected to unwind, and yields should rise; the average of the 10-year since 2000 is 4%.  And while my own view is that the underwhelming US recovery still needs considerable support from monetary stimulus, in no small part because fiscal policy is pushing the other way, there are, of course, risks associated with leaving rates too low for too long.  One hears a lot about those risks, most notably inflation risks (though like Krugman, I don’t see it) and financial instability as investors “reach for yield” beyond paltry bond rates.

But we must also pay attention to the risks associated with higher rates, and one that I keep an eye on these days is the interaction between mortgage rates and refis.  And as the figure below reveals, there’s been sharp, inverse movements in those series in recent weeks.

For obvious reasons, they move in opposite directions as refinancing homeowners replace a higher mortgage rate with a lower one as rates come down.  Most recently, there was a useful dynamic afoot as rising home prices helped to rebuild lost home equity at the same time that the Fed was targeting the mortgage rate by including mortgage backed securities in their asset buys.

That’s a recipe for more refis and the stimulus they provide when families are spending less each month to service their home loan (though as MBA chief economist Jay Brinkmann reminded me, not every refi works that way; some folks maintain roughly the same monthly payment but shorten their loan term, using the drop in rates to pay down their loans more quickly- but they’re the minority).

When rates were at their trough, the average homeowner could save $3,000 a year from refinancing.  Even now, were a homeowner to go from 6.5% to 4.5%, where rates are today—yes they’ve gone up but they’re still low—she could save about $3,800 on a $200,000 mortgage.

Clearly, the sharp dropoff in refis is about the rates, but that’s not all there is to it.  Many potential beneficiaries of refis are locked out, because they owe more on their home than it’s worth. While the Administration has done an admirable opening up the market to those underwater borrowers with loans backed by FHA, Fannie and Freddie, doing the same for those without loans backed by the government would require legislation. The President and others have called for precisely that, but Congress is unlikely to act on it anytime soon.

The housing market is solidly on the mend and while higher mortgage rates will slow down the progress, sales, prices, construction will continue to grow, as much of the inventory overhang in the pipeline has been drawn down.  Access to credit remains a problem, as I discussed last week, and the sooner government regulators clarify rules affecting lenders (e.g., regarding “put-backs,” qualified mortgages), the sooner private capital will make its way back to system, helping creditworthy borrowers get the loans they seek.

But if the refi trend in the figure continues down or stabilizes where it is, we’ll have prematurely lost an important form of stimulus.



Source: Mortgage Bankers Association; Refi Application Index is set at 100 in March, 1990.


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4 comments in reply to "Bye-Bye Refi?"

  1. Subu says:

    Hello Jared:
    Are you sure FHA/Fannie/Freddie have done all they can to help homeowners? I refinanced my home couple years back, but my total payments dropped only ~$80. That’s because now they reduced the upfront mortgage insurance (which can get rolled into the loan), and increased the monthly insurance payments (which I have to pay each month!)
    Not much stimulus there, I’m afraid… Don’t get me wrong, I’m glad for the extra $80 or so each month. But FHA could have stuck to the original terms insurance terms, and saved me even more.
    Just saying.

  2. Joe says:

    If you owe $200,000 on your mortgage and your house is worth $150,000 why not allow a refi of some amount less than you home worth but retain the remainder of the original mortgage.

    Original mortgage – $200,000 @ 6.5%
    Home value – $150,000
    Allowable refinance = 80% of home value
    New mortgage – $120,000 @ 4.5%
    Remaining old mortgage – $80,000 @6.5%

    Not complete relief but mortgage company would have no incremental risk and homeowner would see significantly lower monthly payments.

    BTW – notice everyone always wants mortgage relief from greedy bankers to help homeowner. No one screams about property tax relief from greedy politicians.

    • Rachel Tyrel says:

      Who cares about property tax rates? Property tax payments are 100% income-tax-deductible.

      While it’s true that some jurisdictions charge outrageous percentages for residential property taxes (Travis County, Texas, I’m looking at you), other jurisdictions have statutory checks against creeping property tax rates (California’s Proposition 13, for example), which make tax payments easy to predict and pay from an impound account handled by the mortgage servicer.

  3. Miami Dade Appraiser says:

    Great blog post. One worrisome thing is that the increase in mortgage rates in the last few months is eventually y going to push some home buyers out of the market as the higher rate = a higher monthly payment. This may lead to another drop in property values which (i hope not) could be a re-play of 2008. I’m an appraiser/broker and I am already seeing a drop off in the amount of work I’m getting from the national lenders.