Normally, when mortgage rates drop more than half a point (as they have since mid-August) and applications to refinance nearly double (as they did last week), lenders would expect a big jump in refi production.
But in today's market, lenders are not counting on it. Underwriting guidelines are the tightest they have been in years. Several lenders said many of the people seeking refis do not qualify because they do not meet requirements for equity in the home, credit scores, documented income and assets, or manageable debt levels.
In addition, though Treasury bond yields have also fallen sharply, in recent days uncertainty in the capital markets has caused the spread between the benchmark bond and mortgage yields to widen, potentially reducing the benefit to borrowers.
Lenders' hopes have already been dashed once this year. In January, refi volume picked up, but it fizzled when rates rose nearly a full percentage point within a few weeks.
Brian Koss, the executive vice president of national production at Mortgage Network Inc., a privately held lender in Danvers, Mass., said many borrowers who contacted his company about refinancing last week had bought their homes after 2004, when the housing boom began, "so the value of their homes is lower" now.
"Rates have gotten better, but for all the calls we're getting, most of the people who are calling to refinance can't get help," he said. "Most borrowers don't have the equity in their homes or don't meet current guidelines, so a lot of people who want to refinance can't."
Thomas R. Sullivan, the president and chief executive of the $1.6 billion-asset Firstbank Corp. in Alma, Mich., said many borrowers in his state are trying to get out of "toxic" mortgages but do not qualify for reduced-rate loans because they have too little equity.
"Even with the lower rates, it's hard to say how many borrowers can take advantage," Mr. Sullivan said.
"Community banks are very open to working with customers, but many are going to have a difficult time getting [borrowers] into the fixed-rate products that are available."
The Mortgage Bankers Association said Wednesday that its index of refinancing applications surged 88% last week from the week before.
Orawin Velz, the trade group's senior director of economic forecasting, acknowledged that the correlation between applications captured in its weekly survey and originations weakened last year.
"The index actually overpredicted housing activity," she said. "The index didn't translate to the loans as we would have guessed."
However, Ms. Velz said, she thinks the correlation has improved because the number of lenders has stabilized after a steep decline. The lenders surveyed are no longer getting applications that would have gone to competitors that went bust, she said.
"People have applied some self-restraint," Ms. Velz said. "They wouldn't even bother applying because" they've become accustomed to tighter loan standards.
Still, though refinancing at current rates makes sense for a "substantial number" of borrowers, tighter lending standards and lower home values are likely to restrain activity, she said. "Lower mortgage rates will benefit the relatively well-off or prime borrowers, at first."
Last week the trade group forecast that refi production would drop by more than one-third in the second half of this year, from the first half, to $395 billion.
Tom Millon, the president and CEO of Capital Markets Cooperative, a Ponte Vedra Beach, Fla., provider of secondary marketing services to banks, said the spread between mortgage rates and the 10-year Treasury yield rose Wednesday because of uncertainty about "the level of risk in the global financial system" after the government takeover of American International Group Inc.
"Unfortunately for the mortgage community, spreads keep getting wider and wider, stealing the true refi boom," he said.
Many lenders' pipelines are triple what they were three weeks ago, before Fannie Mae and Freddie Mac were put in conservatorship, Mr. Millon said. "The middle of August was just about the slowest activity we'd seen in 20 years. So you could call this a refi boomlet, but how long it will last?"
