The financial turmoil in Greece could trigger a rebound of mortgage refinance activity in the United States. Or not.
Upheaval in the global markets, such as last week's dramatic sell-offs, has historically prompted a "flight to quality" — investor purchases of Treasury bonds. Surging demand for these safe havens for capital can push yields — and the mortgage rates that move in lockstep — down.
This in turn has often sparked interest in refinancing, and some lenders say they are already getting more calls from borrowers, which typically happens when mortgage rates fall below 5%.
But many lenders also say they need to see a little more downward momentum on rates before an increase in refinancing is likely to stick. Rates would have to drop another quarter-point or more for refinancing to make sense to the large group of borrowers who already were part of a flurry of refinance activity last year. Borrowers would also have to overcome tighter underwriting and appraisal guidelines. And many borrowers still have little or no equity in their homes, making them ineligible to refinance.
"A large part of the population that could refinance likely has," said Mark Freedle, the chief executive of NetMore America Inc., a Walla Walla, Wash., lender.
Freddie Mac said that the average rate on a conforming 30-year mortgage stood at 5% Friday, down 6 basis points from a week earlier, though still higher than the 4.84% average a year earlier.
Typically, borrowers must save at least 75 to 100 basis points on their mortgage rate to have an incentive to refinance. A 50-basis-point reduction doesn't cover the points and processing fees.
"The magic number is four and three-quarters," said John Walsh, the CEO of Total Mortgage Services, a Milford, Conn., lender. "At four and a half, you bring everyone who refinanced at five and three-quarters back into the game, and that's when we'd see a big jump in activity."
Some lenders remain bullish because refinancings have dominated the mortgage market since 2000 and rates today are still lower than they were in 2003, when total mortgage volume hit a record $3.39 trillion. "Every time we think rates have gone as low as they could possibly go, they go lower," Walsh said.
Refinancing has been in a lull, its share of mortgage activity falling last week to 51.9% of total applications, the lowest level since July, according to the Mortgage Bankers Association. Capacity constraints last year caused many lenders to hold mortgage rates artificially high in an effort to control refi volume, but the first-time-homebuyer tax credit expired last month, so lenders now can take on more refi deals.
"There is capacity within the system to originate more if we see rates fall to the mid-4s," said James M. Deitch, the chief operating officer of First Chester County Corp. of West Chester, Pa., and managing director of its American Home Bank mortgage division.
Mortgage rates have not moved much despite the Federal Reserve's announcement in September that it would start selling off $1.25 trillion of agency mortgage-backed securities beginning in March.
But Kevin Marconi, the chief operating officer at United Fidelity Funding, a wholesale and retail lender in Kansas City, Mo., said there is still a strong belief that rates will rise 25 to 50 basis points. He called the idea of another refinance boom based on current rates a "logistical impossibility."
Also, many borrowers do not qualify for lower rates because of higher fees charged by Fannie Mae and Freddie Mac for riskier loan types. Plus, borrowers' refusal to pay discount points also will likely put a crimp on any new refinance activity.
"People don't have the income or the equity to support a refinance," said Tom Millon, president and CEO of Capital Markets Cooperative, a Ponte Vedra Beach, Fla., provider of secondary market services. "If the value of your house is down 30%, it doesn't much matter what the interest rates are."