The refinance boom in home mortgages, which ignited late last year and pushed lending to record levels, may have finally run its course.
The latest weekly survey of lenders by the Mortgage Bankers Association found that just over 42% of mortgage applications in the week ending April 17 were refinancings, compared with 47% the week before. With interest rates inching up, total mortgage applications were down by one-fifth.
"We have seen the wave move through," said Craig Davis, executive vice president of mortgage lending and financial services at Washington Mutual Inc.
A growing proportion of mortgage applicants in April at the Seattle- based thrift want adjustable-rate mortgages, Mr. Davis said, signaling an increase in mortgages to buy a home. Most refinancing borrowers choose to lock in low rates with fixed-rate mortgages.
Refinancings hit a peak in January, when 1.4 million homeowners, or 60% of mortgage applicants, applied to refinance. Another one million homeowners, or 55% of applicants, applied to refinance mortgages in February. By March, the share of refinances had slipped to 48%.
Coming off a refinance high will be painful for mortgage bankers who get most of the business, but it won't be as bad as four years ago, said analyst Jonathan Gray of Sanford Bernstein & Co.
In 1994, a 300-basis-point increase in interest rates by the Federal Reserve brought the previous year's refinance boom to a crashing halt. The high rates and California's continuing economic woes also dampened home sales, and overstaffed mortgage banks responded with a vicious price war.
This time, home sales are at record levels and rates are expected to rise only gradually, perhaps 50 basis points from current levels, to 7.75% by yearend. Nor have mortgage banks staffed up as much as they did last time, Mr. Gray said.
He added one note of caution, however. If the yield curve recovers its normal steepness, mortgage rates could rise more substantially, and the drop-off in mortgage volume would be sharper, Mr. Gray said.
For adjustable-rate mortgage investors, mostly thrifts and some big banks, the decline will stanch the flow of prepaying loans from their portfolios and enable them to resume building their assets.
The boom early in the year was caused by homeowners who did not refinance in November and December despite falling rates, but got around to it after the holiday crush, said Keith Gumbinger, vice president of HSH Associates, Butler, N.J.
January was also when the 30-year mortgage rate fell to 7.05%, its lowest point this year.
Since then rates have gradually trended up, increasing about 25 basis points over the last four months. Those steady rates, while attractive to homebuyers, are not a big draw for refinancers, Mr. Gumbinger said.
"To keep the refi wave going, you need declining interest rates," he said. That expands the pool of mortgageholders from whom a new, cheaper mortgage would save enough money to justify the expense of the transaction.