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Who Benefits From Soaring Mortgage Refinance Volume?

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Refinance relief and lower mortgage rates are starting to become available, but only for those who least need it.

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The AP is reporting Mortgage Application Volume Surges on Refinance Volume Growth and Declining Interest Rates.

"Mortgage application volume skyrocketed 32.2% during the holiday shortened week ending January 4, ending three consecutive weeks of sharp declines, according to the Mortgage Bankers Association's weekly application survey.

The MBA's application index jumped to 706 from 533.9 the previous week, which was also a holiday shortened week because of Christmas. The index can be more volatile around the holidays, as volume tends to be smaller and seasonal adjustments are made. During the same period the previous year, the application index jumped 16.6%."


Curve Watchers Anonymous is Looking at Mortgage Related Data

LIBOR is back to a normal spread for the first time since June 2007.


Click here to enlarge.


That is a positive, especially for those in LIBOR based loans.

Yield Curve for January 9, 2008

Click here to enlarge.

The 10 year treasury has fallen to 3.77%. With that plunge in combination with an easing in LIBOR, a substantial number of people can refinance at attractive rates.


Mortgage Rates Drop


Click here to enlarge.
(All the above charts are courtesy of Bloomberg.)

$TNX 10 Year Treasury Weekly Chart

Click to enlarge


To accurately compare mortgage rates to a year ago one needs to know where the 10 year note is today and where it was a year ago. The above chart shows where the 10-year yield was, about 4.65+- a year ago versus 3.80+- today. That spread is 85 basis points. 15 year mortgages have picked up 42 of those basis points, but 30 year mortgages have only picked up 14 of those basis points. Clearly the market is pricing in some risks over longer terms.

One year ARMs are actually higher than a year ago. Is there a "forced" march into fixed rates just as it makes sense to hold a variable rate loan?

Note the above rates are not exactly comparable to a year ago because down payments are higher, required FICO scores are higher, and fees are all higher than a year ago. All things considered, rates are higher than a year ago. For borrowers with poor credit or non-conforming loans, rates are substantially higher than a year ago.


Where Are Refis Headed?

Looking ahead, expect to see increasing numbers of refis, perhaps substantially so. However, do not expect to see as many refis as when home prices were rising. Refis will be hampered by people being underwater on their mortgages, unemployment rising, and credit card defaults rising. All three of those will have a negative effect on FICO scores at a time when refis are going to require better FICO scores.

Most importantly, those who most need to refinance will not find it so easy, especially if they are upside down on their mortgage or out of a job. Refinance relief and lower mortgage rates are starting to become available, but only for those who least need it.

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