Refinancing Boom Fizzles as Interest Rates Rise From Historic Lows
Thursday, June 4, 2009
A rise in interest rates has put a damper on a mortgage refinancing boom, according to industry data released yesterday, and created another potential stumbling block to a housing recovery.
Mortgage interest rates, at historic lows for weeks, rose to 5.25 percent for a 30-year fixed rate loan last week, a level last seen in January. That led to a 16.2 percent seasonally adjusted drop in mortgage applications, according to the Mortgage Bankers Association's weekly market composite index, a measure of mortgage loan application volume.
The tumble mainly reflects a drop-off in refinancing activity. The index tracking refinancing applications fell 24.1 percent last week, while the purchase index increased 4.3 percent. Refinanced loans make up the majority of the market, but a smaller piece as of last week, according to the industry group.
"If you were looking to refinance for under 5 percent, this puts the brakes on that," said Guy Cecala, publisher of Inside Mortgage Finance.
Homeowners are more sensitive to interest rates when they refinance than when they purchase a home, analysts said. But as long as the housing market remains weak, every factor is amplified, they said. "This is going to be a head wind for the housing market," said Michael D. Larson, a housing analyst with Weiss Research. "It just shows that we shouldn't expect some [quick] recovery in housing."
The average interest rate on a 30-year fixed-rate mortgage increased to 5.25 percent last week from 4.81 percent the week before, according to the MBA. That was the largest increase since October 2008. It is now at its highest level since January, compared with a low of 4.61 percent in March.
"It's important to retain perspective: No one guaranteed to anybody that we would always be at 50-year lows," said Keith Gumbinger, vice president of HSH Associates, a mortgage research firm.
Christopher Cruise, a senior loan officer at GOTeHomeLoans.com, said refinance applications dropped off almost immediately after rates started rising. "People were calling to say: 'Pull my application. It doesn't make sense any more,' " Cruise said. "For some people, it made sense to refinance at 4.5 percent, but it just doesn't make sense at 5 percent."
Cruise said he has two clients who were planning to buy homes and pre-qualified for mortgages. But they didn't lock in the 4.5 percent rate they were quoted, convinced that rates would drop further. "Now, they may not be able to go forward," Cruise said. "Both are closing in late June or early July. Who knows, maybe rates will settle down again."
Brian Bonnet, president of Signature Mortgage, said the climbing rates are discouraging some homeowners from refinancing, but they may have the opposite effect on potential home buyers, who may feel a need to push ahead with a purchase before rates climb further.
"While a slight increase in rates disappoints home purchasers, it does not dissuade them from continuing to look," Bonnet said. "Those people are not going away just because interest rates have gone slightly above 5 percent."
Though still low by historical standards, mortgage rates have inched up as demand for long-term government bonds has waned in recent weeks, analysts said.