US homeowners rush to refinance mortgages

US mortgage applications surged in the latest week as historically low borrowing costs lured homeowners to refinance their existing loans.

Mortgage applications increased 9.3 per cent from the week earlier, the Mortgage Bankers Association said on Wednesday. Refinancing activity increased 11.2 per cent, the third consecutive weekly increase and the highest since August.

“Mortgage rates declined last week, at least partially in response to the [Federal Reserve’s] announcement that they would shift their portfolio towards longer-term Treasury securities, and that they would resume buying mortgage-backed securities,” said Mike Fratantoni, vice-president of research and economics at MBA, an association representing the real estate finance industry in the US.

But the rise in refinancing activity may be short lived given the volatile trading of market interest rates since the Fed announced Operation Twist. After a sharp drop in Treasury yields, that pulled benchmark mortgage reference rates down, interest rates have subsequently risen, erasing last week’s decline.

The rate for 30-year Fannie Mae mortgage bonds was at 3.10 per cent on Wednesday, up from Friday’s low of 2.74 per cent, and this will probably flow through to mortgage providers and keep home loan rates above 4 per cent.

In order to produce a significant refinancing wave, the Fed’s Twist must facilitate a big drop in long-term rates and keep them low for a prolonged period of time, say investors.

“A 3 per cent 30-year mortgage rate serves no purpose without it being available for a lengthy period,” said Robert Kessler of Kessler Investment Advisors.

“Interest rates are a slow working mechanism that exert their influence by how long they are available, but also by how long the public thinks they will be available. “

Mr Kessler added “every basis point of lower rates is worth more as a percentage to nominal debt service payments now than it would be in a higher rate environment.”

For example, a 3 per cent mortgage is 25 per cent less than a 4 per cent mortgage, while a drop in a 10 per cent mortgage rate to 9 per cent is a saving of 10 per cent.

Against the backdrop of falling home prices, refinancing activity is not expected to produce the kind of windfall seen in past periods of lower mortgage rates.

Analysts at Deutsche Bank said “their modelling of local home prices showed almost no significant relationship between changes in mortgage rates and changes in home prices.” The bank added: “The supply of distressed property, the availability of financing and other factors overwhelm the influence of mortgage rates.”