The six-month-long surge in refinancing activity fueled by low rates has pumped up the profits of mortgage banks and stretched beefed-up staffs to their limits.
In recent months, however, the boom has shown signs of weakening.
For the week ended July 6, the Mortgage Bankers Association's index of refinancing applications plummeted 21% from the previous week. For most of the year, refinancing applications have comprised nearly 50% of mortgage activity, but refinancings totaled 39% of all applications in the first week of July. In addition, the average 15- and 30-year fixed rates have slowly risen since March, and the MBA's refinancing index has fallen more than 50% in the same time.
Yet several observers maintained that refinancings have only hit the doldrums resulting from steadying mortgage rates and a temporary dip in demand as borrowers head off on summer vacations. Some even argued that potential remains for a resurgence this fall if mortgage rates again drop.
"We'll still see a good bit of refinances," predicted Robert Couch, president of New South Federal Savings Bank in Birmingham, Ala., though he acknowledged that the market is almost completely dependent on rates. "Tell me where interest rates are going and then I'll tell you if the refi boom is dead," he said.
The average 30-year mortgage rate dropped below 6.95% for the month of March, the peak of the refinancing wave, according to Orawin Velz, an economist at Fannie Mae. And whenever rates are below 7%, she said, refinancings soar. Since then, however, the average 30-year mortgage rate has hovered around 7%, prompting a slight slide in refinancings but keeping the market strong by historical standards.
"To continue a refi boom, you need continually falling interest rates," said Keith Gumbinger, president of HSH Associates, a financial services research firm. Yet interest rates are not the only influence at the moment, he said.
"We've hit seasonal doldrums, so it's not surprising that there's been a little slow back," Mr. Gumbinger said. Many potential borrowers are on vacation, he surmised. "It happens around the Christmas holidays, too; people have other things to worry about besides mortgages."
Doug Duncan, the MBA's chief economist, asserted that the July 4th holiday week was a "funny week." The trade group's refinancing numbers should rise again, he said. Many people took five-day weekends on either side of the Wednesday holiday, he said, which meant they were not walking into their local mortgage offices to refinance. "There's a holiday effect we can't build into the model" used to calculate applications filed, he said.
The MBA's refinance index for the week ending July 13, released Wednesday, rebounded 15.6%, but fell short of pre-holiday levels. Applications for refinancing totaled 41.6% of all applications.
And despite the slowdown, several observers said, refinancings could return to their peak. Barring a change in interest rates, once people return from their summer holidays, Mr. Gumbinger said, refinancings should rise in September.
To be sure, refinancings, having peaked in the second quarter, should decline in the second half, said Ms. Velz, the Fannie Mae economist. Still, she said, the drop would not wash out the market entirely and would leave it in much better shape than a year earlier.
"It was dead last year, when the refi share was truly anemic," she said. Ms. Velz estimated that the industry would have $1.3 trillion of originations this year, of which $685 billion, or 45%, will be in refinancings. Last year the industry reported $224.5 billion of refinancing originations, or 27% of the $821.2 billion market.
Mr. Duncan even speculated that weakness in foreign bond markets, which has pushed international investors into a "flight to quality" in U.S. Treasury securities, could spill over to the mortgage arena.
The heightened interest in Treasuries has pushed up their prices and caused interest yields to fall on the 10-year Treasury bond, a benchmark for fixed-rate-mortgage pricing. If the bond's interest yield continues to fall, he said, mortgage rates should go along for the ride, which would spur refinancings.
Further, Mr. Duncan added, since a significant part of the refinancing boom this year has been tied to homeowners' borrowing against the higher equity in their homes produced by the last five years' price appreciation, potential remains for a strong refinancing market if interest rates stay low.
"This has been an equity takeout boom, and housing prices have held up," he said. "There is still significant equity out there to be tapped. We believe this will be the biggest year on record."
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