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The title for this article was lifted from a piece written for the Real Estate Journal – in March of 2002. At the time, the average thirty year fixed rate mortgage was at just over 7%, slightly above where it rests today. In the interim, there has been a four year housing boom and the Fed has raised the prime rate seventeen times since June of 2004. So the answer to the question is, basically, the refinance rush is over when the borrowers say it’s over.
The Mortgage Bankers Association does seem to think, however, that the refinancing rush has slowed considerably. Home purchase loan activity is off from last year’s levels, but continues to percolate and was up in July of this year. At the same time, the refinancing loan index maintained by the MBA stands at half of what it was last year. Moreover, the percentage share of the mortgage market held by refinancing loans dropped a point - to 34% - in these seasonally adjusted ratings. As an indication of the “it’s all relative” principal, interest rates dropped last week from their four year high, which was still lower than the average at the time the aforementioned article was written, in 2002.
Adjustable rate mortgages (ARMs) are rising in cost as well, another factor that may put a further crimp in the refinancing loan activity. While some people use refinancing as a way of extracting equity from the home and putting it to work elsewhere, a substantial number of people use refinancing as a short term cash resource as well. ARMs that don’t have an onerous penalty for early termination are sometimes the refinance loan of choice for people who want to engage in a three or four year investment that they believe can be paid off after that period.
Despite economic uncertainty, the housing market and the accompanying mortgage market have been on a five year run. It appears that most economic prognosticators feel that run is winding down. There are several factors for the deceleration, not the least of which is that every economic market functions in cycles and the mortgage market has undergone an unprecedented cycle of productivity. It’s due for a cooling off period.
It’s also fair to say that housing prices underwent an unprecedented hike, and that the people who purchased homes during this period are not going to be refinancing anytime soon. For those who have been in their homes for some time, it is also possible that there is going to be an overall tightening of credit and the opportunity to refinance may not be available to as many potential borrowers.
The creative lending methods that were developed in response to high-priced housing markets have led to an extraordinarily high level of loan defaults. Multiple loans that closed at the same time were devised in order for people to buy homes with no down payment and still avoid mortgage insurance costs. Those “piggyback” loans have put a spike in the default rate, and the Fed is going to be issuing new rules to lenders regarding loan activities of that type. There is bound to be some impact on the refinancing loan market; people who would have been eligible for a second mortgage or a refinancing deal last year may no longer qualify after the new regulations are laid down.
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