Over the last few decades mortgage refinance booms have generated more enthusiasm even though we continue to see record breaking mortgage rates. Mortgage companies will tell you that refinance lead activity have been increasing, but the buzz is not as strong as in previous refinance eras. Investors’ flight to the safety of Treasury’s has triggered one positive for the outlook: A rush by homeowners to refinance their mortgages to free up cash or shorten loan maturity. But Americans are refinancing their mortgages with more sobriety than they showed during the refinancing madness of the early 2000s.
Because mortgage rates follow Treasury yields, the flight to safety has pushed a 30-year fixed rate loans down to 4.42 percent, the lowest level since Freddie Mac began tracking rates in 1971. Homeowners who are credit-worthy and have equity in their homes are responding. According to the Mortgage Bankers’ Association, refinance applications in mid-August have been increasing since late April and stand at their highest level since mid-May 2009.
Economists at Morgan Stanley estimate that if half of agency-backed mortgage loans were approved for refinance loan, it would free up $46 billion a year for consumers. To put that figure in perspective: it is more than the $34 billion in extra income coming from the extension of long-term jobless benefits. And it is about equal to the increase in private-sector wages and salaries since December 2009, when business began to add workers again. The gain, however, won’t contribute totally to economic growth. For one thing, the flip side of refinancing is a loss of income for banks and holders of mortgage-backed securities who will see millions of underlying mortgages prepaid.
When mortgage refinance rates dipped in the early 2000s, millions of the owners rushed to refinance and saved a total of $61 billion in pretax interest payments. In addition, those past refinance booms involved massive amounts of money withdrawn from home equity. Nearly 45 percent of homeowners took cash-outs during the refinances of the early 2000s. That extra money stimulated economic growth. According to one Federal Reserve survey, 51 percent of the cash-out money was used for home improvements or other consumer expenditures. Only 26 percent of mortgage refinancing was used to repay other debt. Read the original Wall Street Journal Article.