Around 37% of all borrowers with 30-year conforming fixed-rate mortgages—who collectively hold about $1.2 trillion of home loans—have mortgage rates of 6% or higher, according to investment bank Credit Suisse. Many could reduce their rates by a full percentage point if they refinanced at current rates, about 5%. More than half could lower their rates nearly three-quarters of a percentage point, according to Credit Suisse.
But new refinance applications in January stood near their lowest levels in the past year. Weekly data compiled by the Mortgage Bankers Association also show that refinance activity has been muted, considering that rates are so low…
The last time mortgage rates were at current levels, in 2003, refinancing activity hit $2.9 trillion, according to trade publication Inside Mortgage Finance. Last year, refinance volume reached $1.2 trillion, the highest amount since 2003 but not nearly as much as expected, considering how low interest rates have fallen.
Tighter lending standards must be factored into this decline in total refinancing volume as it's safe to assume that the 25% of mortgage holders currently “underwater” are effectively precluded from refinancing. But I have to believe many of the other 75% of homeowners with at least some equity (Americans still have roughly 50% equity in their homes in total) are simply choosing not extend the duration of their indebtedness.The Los Angeles Times recently published an article on an interesting new trend towards, “cash-in” refinancing rather than “cash-out” refinancing which was so popular over the past decade or so.
Cash-outs hit their highest level of popularity during the wild appreciation streaks in the early and middle years of the last decade. In mid-2006, just before home values began deflating across the country, the rate of cash-outs hit 88%, according to Freddie Mac, which monitors refinancings quarterly.
This meant that nearly 9 out of 10 refinancers whose loan files were sampled by Freddie Mac increased the size of their mortgage balance by at least 5% in the process. It was the heyday of the pile-on-more-debt mind-set — cash me out, I can't lose on my real estate — that came crumbling down in 2007 and 2008, when home equity holdings shrank drastically and painfully…
Now the pendulum in consumer psychology appears to be swinging toward reduction of household debt — whether on credit cards or mortgages.
In Freddie Mac's latest quarterly survey of refinancings, 33% of homeowners put cash into the deal to lower their mortgage balances, the highest percentage ever. By contrast, only 27% of refinancers took cash out — the lowest percentage on record…
Cash-ins, in effect, are a disciplined form of saving — one that in today's depressed rates for competing types of savings might be an astute financial move.
I suggested earlier any signs like this of consumer deleveraging could have severe consequences for the economy. Consider that in 2005, homeowners cashed out roughly $1.4 trillion of their homes' equity. This is equivalent to fully 10% of total United States GDP.