MADISON, Wis. — As quickly as it started, the refinance boom may soon be over.
The economy appears to be headed into a new phase of uncertainty as unemployment moves higher, major financial institutions struggle with their balance sheets and the nation's currency moves in all sorts of directions, sources told Credit UnionJournal. A steepening of the yield curve on Treasury notes and jumps in long-term interest rates that began a number of weeks ago kick-started a discussion among economists and other experts on the possibility of serious inflation and corresponding Fed rate hikes by the end of the year.
Despite the central bank's best efforts, mortgage rates have jumped significantly from their lowest ebb; that may hurt CUs relying on refinance and first home loan volume to prop up otherwise lackluster consumer demand for loans.
"I think we have a ways to run with the refinances because the vast majority of Americans are working. We always forget that. Just because you haven't caught the pure bottom doesn't mean it's not a good deal for you," argued Dave Colby, economist at CUNA Mutual, adding he believes there will be an influx of people who are afraid they missed the bottom and will jump in even as rates tick higher from unprecedented low levels.
A Slew Of ARMs To Reset A slew of option ARM mortgages will reset in the coming years and individuals who still have good paying jobs and positive equity will undoubtedly look for refinancing options, keeping that segment steady, Colby continued.
But Bill Vogeney, chief lending officer at Ent FCU in Colorado and secretary/treasurer of the CUNA Lending Council, sees it quite differently, saying that the higher rates "pretty much killed the refinance market," but falling home prices will keep first mortgage volume steady. "I'm sure the average Realtor will claim the sky is falling, but in reality, in many markets, prices have fallen to the point that the average consumer can potentially buy a home again," he said.
Homeowners anxious for the market to turn around could either curse or praise the higher rates as they may push more and more people onto the sidelines and wait for better deals or entice them to buy now and not risk even higher rate later.
"That's certainly a possibility," Vogeney mused. "In general, a 1% increase in fixed rates requires the buyer to purchase a home for 10% less than at the lower rate to keep the same approximate rate. I don't see that rates in the 5.5% to 6% range will cause home prices to fall further-they're still historically good rates. In fact, a slight increase in rates could cause some people sitting on the sidelines to buy."
A Perfect Opportunity
With refinance volume slowing, and rates rising, now is the perfect opportunity to entice potential homebuyers by zeroing in on not only the lower prices, but also new federal tax incentives. "There's probably some inertia or momentum left in the $8,000 homebuyer tax credit that expires at year end," said Bob Dorsa of the American CU Mortgage Association, noting that he has not seen one major CU that has heavily promoted the tax credit. "Here's a great opportunity to help younger members, which CUs are in dire need of with a great program. But because the production levels were overwhelming they put that on the backburner."
The "boom" in refinancing is over, Dorsa contended, saying 4.5% mortgage rates will not be seen again. "We are accelerating our reminders [to CUs] that we are headed back to a normal market... we're going to have to be able to quickly adjust," he said, adding that credit unions will still benefit over the long haul from the recent upheaval if they continue to be aggressive, as market share in home loans has doubled in the last few years and member awareness that CUs provide mortgage services has spiked dramatically in the last six to 12 months.
Where rates go from here is likely to be the subject of much more debate as monetary policy and a rally in commodities plays off against continuing declines in home values and rising unemployment. Colby believes inflationary forces should be dampened but cautioned that the current global recession throws out all the old models.
"It's more uncertain because of the global nature. A lot of fundamentals that worked before where the US economy goes into a recession, the dollar weakens and export demand goes up," he said, noting the phenomenon has not happened with export demand falling along with import demand and the dollar's value fluctuating. But the economist urged CUs to stick to their asset liability management policy and focus on what is happening today. "It doesn't do credit unions' balance sheets any good to guess. I think they need to stick with the game."
