Wave goodbye to refi

In a market where homes aren’t selling and many consumers are afraid to buy, refinancing has been instrumental in keeping the mortgage industry on its feet. Sure, programs like HARP haven’t help the number of homeowners it set out to, but persistently low mortgage rates have kept mortgage borrowers interested and engaged in trying to lower their monthly mortgage payments.

Yet according to a forward-looking forecast from one industry source, this country will experience a huge falloff in refinance volume in the very near future.

On Tuesday, the Mortgage Bankers Association announced that they expect “to see mortgage originations fall from an estimated $1.2 trillion in 2011 to $900 billion in 2012. The drop will be driven by a significant decline in refinance originations, while purchase originations will increase only slightly.”

Even though mortgage rates have reached historical lows this year, the MBA expects refinance volume in 2011 to be even lower than it was last year. Furthermore, this doesn’t appear to be a fleeting trend. ”We expect this ‘burnout’ to continue through 2012 and 2013,” said the MBA.

Is this refinance burnout for real?

Unfortunately yes, but perhaps not the extent that the MBA has forecast.

Anyone who has tracked the mortgage market for any extended period of time will tell you that no refi boom lasts forever. Large waves of refis are triggered by falling and/or persistently low mortgage rates. Yet as time goes on, either three things will happen:

1. Certain homeowners refinance to a lower rate, taking them out of the market for a future refinance (if mortgage rates keep falling these borrowers may even qualify to refinance a second time).

2. Other homeowners are deemed unqualified and thus cannot refinance.

3. A new program comes along, expanding the refinance opportunity to a new pool of borrowers.

Eventually, refinance volume fades as the number of qualified borrowers dissipates.

What’s the economic impact?

What will happen to our already struggling economy if refinance volume takes a nose dive?

“It’s not a direct loss, per se, since it’s simply churning old paper into new,” explains HSH.com VP Keith Gumbinger. “However, there would be fewer commissions made by loan officers, less work for appraisers, etc., so there is some economic benefit which accrues from the mechanics of the process.”  

Is it time to focus on buying rather than refinancing?

Given the expectation that refinance volume will consistently decline as time goes on, perhaps it’s time we begin to think about strengthening the purchase market.

What needs to happen for purchase volume to pick back up?

“For one, jobs, and the economic growth which produces them,” says Gumbinger. “We need to see a stabilization of home values and a steady if not sharp rise in consumer confidence as well.”

What about homebuying incentives like the homebuyer tax credit? Gumbinger warns against the notion that perhaps it’s time we think about bringing back homebuying incentives (like the tax credit).

“Part of the mess we have now is a result of those efforts. The demand got ‘advanced’ from 2011 into 2010 to take advantage of the offer. But that was done in expectation that the economy would be better by now and generating at least some demand on its own. Unfortunately, that didn’t happen (at least not so far).”

Don’t wait to refinance

Qualified borrowers should forget about future-market forecasts and concentrate on the present. Mortgage rates are as low as they have been decades. Borrowers who refinance now will likely never have to refinance to a lower rate ever again.

And remember, as loan officer Dan Green wrote earlier this week on HSH.com, “If your loan has been turned down for any reason, start a search for new mortgage lenders. Your loan may be approvable–you just have to find the right bank.”