Declining Mortgage Rates Spur Near-term Refinancing Activity

Declines in fixed mortgage rates to about 4.9 percent in May helped boost refinance applications during the month, which will lead to increased refinance originations late in the second quarter and early in the third quarter. As a result, we upwardly revised our projection of refinance originations, albeit moderately. Despite historically low mortgage rates, a big refinance boom is unlikely at current levels. Since the beginning of 2009, there have been several occasions where rateswere at or below currently prevailing rates, effectively lowering the rate at which borrowers would be “in-the-money” to refinance. As lending standards have remained tight, there are significant barriers to refinancing, including high loan-to-value ratios, low credit scores, and uncertainty about job prospects.

Our outlook calls for the fixed mortgage rate to hover around 5.0 percent for the rest of year. Unless the rate moves closer to 4.5 percent than 5.0 percent, we do not expect that the recent surge in refinance activity will be sustained. Signs of waning interest in refinancing have already emerged. After four consecutive weekly gains, refinance applications posted a 14-percent drop in early June, even though the fixed mortgage rate edged lower.

Our 2010 outlook on home sales and home prices, and thus purchase mortgage originations, were little changed from the May forecast at $698 billion, while our projected refinance originations were increased by about $90 billion from the May forecast to $669. For all of 2010, total mortgage originations are projected to decline to $1.37 trillion from an estimated $1.92 trillion in 2009. The purchase-refinance mix is projected to be nearly balanced, with a refinance share of 49 percent.

Mortgage debt outstanding (MDO) for 1-to-4 unit single-family properties fell at an annualized rate of 4.0 percent in the first quarter—marking the eighth consecutive quarterly drop and the biggest since data collection began in 1952. The ongoing decline reflects charge-offs as well as household deleveraging, which also occurs for non-mortgage debt. Since its peak in the first quarter of 2008, single-family MDO has fallen by nearly $500 billion. We expect it to continue to decline through the rest of the year. For all of 2010, MDO is projected to decline by 3.8 percent, accelerating from a 1.9-percent decline in 2009.