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Home Refinance Applications Spike

[Dec 4, 2008.]


During the week of Thanksgiving, the Market Composite Index increased 112.1 percent on a seasonally adjusted basis from one week earlier. The Market Composite Index measures residential mortgage loan application volume.

“Many borrowers missed an opportunity to take advantage when rates dropped sharply for a brief period when the GSEs were placed under conservatorship,” said Orawin Velz, Associate Vice President of Economic Forecasting. “When rates plummeted following the Fed’s announcement that it would buy GSE debt and MBS, many of those on the sidelines decided to quickly jump in and take advantage of lower rates before they began to rebound.”

The Federal Reserve's announcement that they would purchase mortgage-backed securities led to a drop of about 0.50 percent in conforming 30-year fixed-rate loans.

According to a Wall Street Journal article, as many as 85% of borrowers with conforming mortgages (those eligible for backing by Fannie Mae and Freddie Mac), now have an incentive to refinance compared with 7% at the start of November.

Although the incentive may be there for many consumers, many will be unable to obtain these loan rates or refinance their loan at all. Tighter lending guidelines and declining home values will likely keep many current homeowners on the sidelines.

It's also rumored that the U.S. Treasury Department is formulating a plan to drive mortgage rates down even further. Their goal is to see rates fall to the 4.5 percent level by subsidizing tens of billions of dollars worth of 30-year, fixed-rate mortgages. These rates, levels not seen since the 1960s, would only be available to those consumers purchasing new homes. Existing homeowners would be unable to refinance at these rates.

Many experts feel this will certainly help stabilize real estate prices by helping to increase demand, however, the plan will do little to help those existing homeowners currently facing foreclosure.

The plan may also lead to a great deal of unhappy homeowners who have been working hard to make their payments on time but will not be able to refinance at the low rates their new neighbors will obtain.


About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.

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