Home Refinancings Ebb But Won't End

As interest rates climb, home refinancings are plunging — and analysts say they're on their way to their lowest counts in decades. But refis aren't going away, and banks faced with a shrinking pie may offer easier borrowing terms.

Refinancings will still total $400 billion to $500 billion in 2014, even though economists believe rates can only go up as the Federal Reserve gradually reins in its massive stimulus. Most people refinancing in the near future will be those shaking off the shackles of the downturn, such as home values that plunged to a level that wouldn't allow a refi, for example, or a job situation unacceptable to wary lenders.

Applications to refinance have fallen 63% since early May, as the 30-year mortgage rate has jumped a full percentage point to 4.62%, according to the Mortgage Bankers Association.

Refinancings will account for 36% of $1.1 trillion in originations next year, the MBA predicts. Some analysts think that might be conservative: Compass Point Research projected $490 billion of refi activity in 2014 in an Aug. 29 research note.

In the last decade of generally falling rates, refis never accounted for less than 50% of mortgage activity, and in the past few years have neared 70%, said Guy Cecala, CEO of Inside Mortgage Finance.

While fewer people will take equity out of their homes to spend like they did during the housing bubble, rates have never remained so low so many years into an economic recovery.

The government is also much more invested in helping people refinance now, said Jed Kolko, chief economist at Trulia. The Home Affordable Refinance Program (HARP), launched in 2009 as part of the stimulus program, helps underwater borrowers refinance.

The overall economic boost from refinancings in the future won't be as strong as it was when mortgage rates hovered in the 3% range, Kolko said. But it will still give a boost to thousands of individual pocketbooks.

Loans for buying a home are expected to gradually increase, but only partially offset refis' decline.

Major lenders such JPMorgan Chase (JPM) and Citigroup (C) have announced plans to eliminate thousands of mortgage-related jobs.

In past cycles, Cecala said, lenders have responded to sharp declines in refinancing activity by lowering underwriting standards.

"As business dries up, lenders are more willing to dig deeper. Didn't that get us into trouble years ago? Yes, it did," he said.

But so far looser standards are just incremental. The average Fannie Mae credit score is 755 vs. 765 a few months ago, for example.

Sean McLean, a mortgage broker with Guardian Financial in Maple Grove, Minn., finds that lenders are "all over it" as long as borrowers are qualified.

One of McLean's recent success stories is a client who took out a mortgage in 2004, and was facing a $160,000 balloon payment next July. The client withdrew $30,000 from his retirement fund to refinance into a conforming loan. One thing going for him, McLean said, was that he had "fantastic" credit.

McLean thinks that underwriting standards may loosen, but only to a point, because post-crisis regulation makes lenders skittish.

Driven By Rates

To be sure, it's impossible to predict the refi market, because it is driven so completely by interest rates. "Unlike every other measure of housing activity, refinancing changes very quickly and very strongly when mortgage rates move," Kolko said. "Refinancing is a much easier decision for a consumer to make than buying a home. Deciding not to refinance is also much easier.

But lenders can only benefit from wooing anyone who hasn't refinanced recently into a lower rate, Cecala said. "Everyone knows that's the low-hanging fruit," he said. And lenders who keep borrowers on the books with higher rates should be worried about another bank snatching them away.

The average profit from a refinancing is $2,000-$2,500, Cecala said. "Any profit is better than no profit.

As rates depress the refi market and rising home values shift attention to homebuying, McLean said he knows the focus of his business is going to change. But he hasn't written off refis altogether. "I honestly don't think refis are going to quit," he said.