Mortgage debt refinancing has been a strong point in the mild recovery the United States is experiencing.
Many Americans have taken advantage of low interest rates by doing a rate and term refinance. Some have even shortened the term (duration) of their mortgage while maintaining a lower dollar monthly payment even. Now that is an economic plus.
When mortgage rates collapsed from the 5% level in early 2011 to the low of 3.25% last year, this created a series of serial refinances and Harp 2 borrowers who jumped on this historical economic event.
Recently we have seen a move up higher in rates and some are asking if we have already seen the bottom.
I believe the low point in yield on the 10 year note was struck last year after the Spanish Default Fear trade sent an already highly manipulated 10 year note to break slightly under 1.40. Absent another major calamity in the world we have seen the low point in the yield of the 10 year note. With that backdrop rates should be rising higher. There will likely be some pull backs since the FED is stilling buying Mortgage Backed Securities for 2013. There is some concern we might get a spike in the 10 year note. However, my bet is that there is only a slight possibility of a spike. Why? I don't think America will be punished for it's government debt load in 2013. We may face consequences years down the road, but not this year.
So what does this mean for the Mortgage Refinance Market? Clearly, the mega boom market in home refinances is done. Origination volume in 2012 was very high due to the factors mentioned above. We won’t see that type of volume again unless rates broke under 3%. Even with the Fed promising to buy MBS, I don't see that lower break happening. If Mortgage rates get to 3.75% and stay above that range the pool of available refinance candidates is small. Barring a Harp 3.0 Product for private label loans, all those who could refinance did so last year.
This is not to say there aren’t yet people who may refinance, of course. There are, but not in the high numbers we saw last year. The refinance boom we have seen these last few years is clearly in the danger zone . For 2013 refinance origination will clearly be lower but the real trouble could come in 2014. The Fed will likely call an end for QE (MBS purchases) which will push rates toward the path of normalization, or more toward the 6% level years from now. Concern at the Fed is already being expressed about their 3 trillion dollar balance sheet. And that balance sheet is north of 4 trillion dollars in less than a year. I suspect by Q2 2014 QE is over and then eyes will be watching to see when the Fed raises short term rates and if they stick to that 6.5% unemployment rate metric.
Potentially there is a future effect of all these low rates captured by some Americans . There are now numbers of homeowners who have locked in very low (cheap) money for 30 years. Down the road if they plan to move by first selling their home, clearly they lose that inexpensive mortgage and will likely be looking at a higher interest rate for their next home. Unless home prices have dropped dramatically, or they are scaling way down in size, their monthly payment will rise, maybe substantially. Will this affect their decision to move, or not? Would some decide to hold onto their first house, and turn it into a rental, while buying another home? It's not that easy to rent a home and qualify for another mortgage on top of that. Let a lone having the liquid asset ready for a down payment without selling a home. So, years out there will be many Americans thinking about this problematic situation. Some may not even qualify for a mortgage when rates normalize to 6% or higher.
In the short run this last refinance boom certainly brought disposable income into the hands of those who could refinance. This extra disposable income may have helped the consumer economy a bit. However, the overall state of the housing market was not changed. The Core problem in housing yet remains with us. We simply do not have enough qualified home buyers to cause a rise in prices or expansion of homeowners (excluding cash buyers). Until we get more job growth, higher incomes and better liquid asset profiles for first time and traditional home buyers, we are going to be in the same boat. And that boat yet remains sloshing around in the doldrums waiting for a rising tide.
Logan Mohtashami is a senior loan officer at his family owned mortgage company AMC Lending Group, which has been providing mortgage services for California residents since 1988
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