A second-quarter refinancing study by Freddie Mac shows that 15-year fixed-rate mortgages are increasingly popular among borrowers refinancing their 30-year fixed-rate mortgages. But investors in mortgage-backed securities said they were steering clear of 15-year paper.
The study found that among borrowers with 30-year fixed mortgages who decided to refinance, 31% moved into 15-year fixed in the second quarter, up from 27% in the second quarter of 1997.
Nearly 43% of conventional mortgage applications in the second quarter were for refinancing, down from 57% in the first quarter, Freddie Mac said.
The number of borrowers with 15-year fixed-rate mortgages who refinanced back into 15-year mortgages fell in the second quarter to 72%, from 77% in the first quarter, the study found. And 62% of borrowers with 30-year fixed-rate mortgages selected new 30-year fixed loans in the second quarter, down from 64% in the first quarter.
Refinancing into 15-year mortgages is a result of demographic trends as well as interest rates, said Robert Van Order, chief economist for Freddie Mac.
"Rates are low, the baby boomers are at their peak earning years, and they're spending some of it on paying off the mortgage faster," Mr. Van Order said.
Whenever there is a refinancing wave, there will be more 30-year mortgages refinancing into 15-year mortgages, because borrowers can maintain the same monthly payments or even reduce them, said Akiva Dickstein, vice president for mortgage research at Lehman Brothers.
This leads to a somewhat higher supply of new 15-year bonds on Wall Street, he added. Traders on Wall Street noted that a mortgage typically takes one to two months to be transformed into a mortgage-backed security.
Martin J. Schafer, vice president for Invista Capital Management, Des Moines, a subsidiary of Principal Mutual Life Corp., said he has stayed away from 15-year paper, preferring 30-year paper.
"The front end of the curve has been held hostage by the Fed, so if the market rallied, the 15-year paper would underperform," he said.
Fannie Mae's net income for the second quarter reached $848 million, up 12.66% from the second quarter last year, the company said.
Income per common share, diluted, was 80 cents, up from 69 cents, Fannie Mae said.
Record business volumes, strong growth in fee income, and declines in credit losses led to the increase in earnings, Fannie said. The strong housing market also led to record levels of commitments, purchases, and mortgage-backed security issues for the company. Fannie said that these factors also helped increase fees and reduce credit costs.
Fannie Mae's net mortgage portfolio grew at a 27.4% annualized rate, and net mortgage-backed securities grew by an 8% annual rate, balancing declines in the net interest margin and in the average effective guarantee fee rate, the enterprise said.
Jonathan E. Gray, principal at Sanford C. Bernstein & Co. said both Fannie and Freddie had huge volume growth in the second quarter.
He said Fannie Mae's growth in its retained portfolio for July approached $11 billion and is reaching "breathtaking" levels, as it appears the company will have 22% growth for the year.
But thin spreads on new mortgage volume and an inverted yield curve have kept mortgage spreads this year between 75 and 80 basis points, way below the average for the last 10 years and below the usual level of spreads during a refinance boom, Mr. Gray said.