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Wednesday, August 27, 2003

End of US Re-Fi Boom in Sight

Some commentators are claiming that the end of the refinancing boom which has played such an important role in keeping US consumption afloat may now be in sight. From here in Europe it is difficult to reach any firm conclusions on this. Everything depends on how strongly the US recovery goes forward, and how much of a problem the deflation fears become. If, in order to try to build a deflation firewall, the Fed starts to intervene vigorously in the Treasury market to bring down the yield curve, then mortgage rates can come down again, and this can kick off the re-fi cycle one more time. This view that it is over definitely depends on the recovery gathering momentum.

The biggest U.S. refinancing boom ever may be finally coming to an end. With refinancing applications slumping more than 20 percent last week, and nearly 80 percent in just three months from their all-time peak, some economists are declaring the end of the refinancing wave that has buoyed a struggling economy. "You can definitely say the refinancing boom is over," said Drew Matus, economist at Lehman Brothers. On Wednesday, the Mortgage Bankers Association of America said its seasonally adjusted gauge for applications to refinance loans fell 21.3 percent to 2,169 for the week ended Aug. 22. The index has fallen eight weeks in a row and is 78 percent below the record high of 9,977.8 set in the last week of May.

The swift rise in mortgage rates since mid-June from their 45-year lows has closed the doors for homeowners looking to refinance mortgages at lower rates, which would free up cash for them to spend or pay off other debt. "That takes away the financial incentive for many families to refinance," said Frank Nothaft, chief economist at Freddie Mac, the No. 2 U.S. mortgage finance company. Even if rates head lower again, it will probably not be enough to push refinancing back up toward the recent record level, analysts said. "We think rates could drop by the end of the year," said Jay Brinkmann, vice president of research at the Mortgage Bankers Association. "But we are not expecting a big surge in refinancing."

Interest rates, excluding fees, on 30-year fixed-rate mortgages, the home loan held by most Americans, averaged 6.22 percent, unchanged from the prior week but well above the low of 4.99 percent set in the second week of June. The record refinancing boom began in April 2002 just months following the conclusion of the prior refinancing wave during 2001, according to Brinkmann. The financial markets lost faith in a rapid U.S. economic recovery last year even after a series of aggressive rate cuts by the Federal Reserve. Pessimism over the economy forced down U.S. Treasury yields, used to set many U.S. mortgage rates. The combined economic impact of the two refinancing cycles has resulted in roughly $165 billion in spending on home improvements and investments, and helped Americans pay off about $85 billion in more expensive personal debt, according to industry estimates. "It did a good job to help consumers to spend and to clean up their balance sheet," Lehman's Matus said.

Although loan demand for refinancing has fallen sharply in recent weeks, demand for loans to buy homes has dropped only slightly, supported by strong home sales and construction. "Home sales are still quite robust," Nothaft said. In July, sales of new homes dipped 2.9 percent to an annualized pace of 1.165 million annual rate in July from a record high of 1.20 million in June, while sales of existing homes hit a record annual rate of 6.1 million last month. A slight cooling of the housing market and the likely final chapter of the refinancing boom coincide with recent signs that other sectors like manufacturing are starting to turn higher. The Mortgage Bankers Association's index of demand for loans for home purchases slipped to 375.5, down 3.6 percent.
Source: Yahoo News

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