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Thursday, December 25, 2008

Mortgage Demand Up: Now What

According to the Mortgage Bankers Association, mortgage applications hit a five year high last week.

U.S. mortgage applications surged to the highest level in over five years in the latest week, as potential borrowers came out in droves to refinance as government interventions helped push interest rates down to record lows, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Dec. 19 soared 48.0 percent to 1,245.4, the highest reading since the week ended July 18, 2003, when it reached 1,284.3.

Potential borrowers were lured by mortgage rates that have dropped dramatically since the Federal Reserve unveiled a plan last month to buy up to $500 billion of mortgage securities backed by government-sponsored enterprises Fannie Mae and Ginnie Mae. The program also entails buying up to $100 billion of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Now, I have long said that the best way out of this recession is through another mini refinancing boom. On the other hand, I warned that manipulating mortgage rates would be a bad idea. I had hoped that the bad economy would drive rates down on its own. Now, it appears the Federal Government is motivated to do this on its own. Now, we will all see if I am right.

Now, the data is not very specific. In fact, while mortgage applications are up, the report doesn't distinguish between refinances, purchases, and those that are trying multiple times to get a loan. With guidelines more restrictive, the same borrower trying over and over to get the same loan will become a bigger phenomenon.

The refinancing boom is in full swing but what isn't clear yet is its effect. It certainly isn't clear if the refinancing boom has had any effect on buying. Furthermore, because only those with a perfect credit profile can now get financing, it isn't clear what lowering their rates will do. Anecdotally, I have found that many of these borrowers are simly shortening the term from 30 years to 20 years, etc.

The problem as I see it with manipulating rates down is that ultimately their will be a very big boomerang on interest rates. Since this is being done with extremely loose monetary policy, at some point that will be inflationary and cause all long term rates, including mortgages, to go up. If this doesn't have its desired effect now, it may be disastrous later on.

As such, the most important data will be the next round of data on housing sales? If the lower rates transfer into more housing sales, then this new refinancing boom may go a long way toward stabilizing housing. If, on the other hand, it's only a refinancing boom, it may ultimately have a counter productive effect. That's because this new boom will fit folks with unusually low rates and cause many not to want to move because rates in the future will be much higher.

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