Mortgage rates have fallen to their lowest levels since December, but lenders say they aren't holding their breath for a refinance boom to lift them out of a slump.
Some lenders reported a modest pickup in refinance volume in recent weeks. But it will take a much sharper rate drop to spur homeowners to replace their mortgages at lower rates, experts said.
"Rates have to fall consistently below 7.5% and probably closer to 7%, to ignite a significant rebound in refinancing activity, primarily because so many homeowners refinanced at very low rates back in 1998, when fixed mortgage rates were at or below 7%," said Mark Zandi, chief economist at RFA Dismal Sciences, a West Chester, Pa., economic research firm.
HSH Associates in Butler, N.J., says the average rate for a 30-year fixed-rate mortgage peaked around 8.82% on May 18 and was around 8.10% Tuesday, its lowest since Dec. 24. The decline has inspired some borrowers to apply for new loans, as evidenced by the Mortgage Bankers Association's refinance index, which jumped 12% in the week that ended Aug. 11.
But it has not been enough to constitute a turning point for an industry that has been contracting for the last 12 months. And even though the Federal Reserve left rates unchanged Tuesday, the central bank said it is worried about inflation and may yet tighten credit down the road.
Sam Levine, senior vice president and national retail lending manager at GMAC Mortgage, a unit of General Motors based in Horsham, Pa., said refinances constituted 27% of applications received by his division in August, up from 22% for most of the year.
Mr. Levine said the refinance requests have come predominantly from consumers with adjustable-rate mortgage borrowers whose rates are about to adjust. These homeowners could end up paying rates as high as 9% if they do not refinance. "Our highest activity on the refinances have been from our ARM portfolio," he said.
Mr. Levine said that, given last year's ARM activity, which picked up and remained strong through the fall and winter, refinance activity should have a similar increase in the next four months. But he said he does not expect much activity from borrowers with fixed-rate mortgages, though they are inquiring.
"If someone is sitting there with an 8.5% or 8.75%, they'll inquire," he said. "But until it hits 7% or below, I don't think you're going to see any great surge in refinance activity."
Part of the problem is that for those who bought homes in the last year and took out loans at 8% or higher, refinancing at the current rates is an expensive proposition if one factors in all the closing costs and fees. Lenders offer no-cost refinances, but at higher rates.
"Right now it's about 8.625% for a no-cost refi," said Keith Gumbinger, vice president at HSH Associates. "It's not as though you can walk in and get a new mortgage at a tremendously better rate for free."
Todd Householder, executive vice president of secondary marketing with National City Mortgage in Miamisburg, Ohio, said the refinance pool still is made up of just three groups: people who missed the 1998 boom altogether, adjustable-rate borrowers, and, to a more limited extent, those who received a mortgage earlier this year.
He added, however, that the recent dip in rates has given the mortgage market a psychological boost. "I think what it does is it keeps consumers who are looking at either purchasing up or buying for the first time in the market," he said. "It has a positive effect on those folks and how they look at things. It keeps them in the market and keeps them optimistic with where rates are."
At Principal Residential Mortgage Inc. in Des Moines, a unit of Principal Financial Group, refinance volume for the week that ended Aug. 19 rose from the week before -- but only by 1%. "This isn't what I'd call a groundswell by any measure," said Paul F. Bognanno, president and chief executive of Principal Financial.
Mr. Bognanno said he does not expect a groundswell anytime soon. "It doesn't appear at this point that there's much downward pressure on mortgage rates," he said.
At least some of the recent reduction in mortgage rates was the result of technical factors -- a narrowing of spreads between Treasuries and mortgage-backed securities -- rather than fundamental reasons, he said.
The most optimistic mortgage executive surveyed by American Banker this week was Doug Perry, first vice president of the consumer markets division at the largest independent home lender, Countrywide Credit Industries
In an interview Tuesday Mr. Perry said he believes the market conditions are right for a refinance boom, but have not caught fire with consumers yet.
"It's my feeling that we're right on the cusp of" a refi boom, he said. "We've seen a lot of rate decreases, and I'm a little bit surprised that consumers have not picked up on it."
Mr. Perry said that to increase awareness, Countrywide has begun working the phones to let customers know about opportunities.
He added: "We're already there, in my opinion. The further we go down is just going to open up a much wider group of people who can take advantage of it."
Countrywide is famously prescient about its staffing needs; in March of last year, in anticipation of a slump, it was the first major mortgage company to start laying employees off. Despite Mr. Perry's optimism, he said Countrywide has not begun staffing up to accommodate the flood of requests that typically come during a refinance boom
"Things have been healthy and operating at a good pace, but until it really ticks up to that point where we need to flex our muscle, we have the available staff," he said.