Refinance mortgage rates remain surprisingly low, in fact rates in late September were actually more than .25 percent below the interest levels seen at the start of the year.
Recovery and Rates
How is this possible? Shouldn't an economic recovery send refinance rates higher?
The usual theory is that as economies expand, there's more demand for capital. Businesses add new facilities and hire additional employees. The result is that with more demand for money, the cost to borrow capital goes up, including the expense to finance real estate.
So if the economy is recovering, why isn't the demand for capital increasing -- especially the capital needed to finance real estate?
A big part of the answer is that mortgages can last for years and in the end they can be replaced with -- well -- nothing. In fact, "nothing" is really the goal, to have a home which is mortgage free, where the loan has been paid off.
Push Me, Pull You: Supply and Demand in Mortgage Lending
One can see the strange forces which move markets in several ways:
First, in 2012 and early 2013, homeowners saw refinance mortgage rates that were at or near historic lows. Many people refinanced during that period and therefore they have little need to refinance again. The impact of the mass refinancings in 2012 and 2013 is so great that the Mortgage Bankers Association estimated refinancing levels in 2014 would fall 60 percent.
Second, the mortgage marketplace is flooded with money. In the effort to balance supply (cash) and demand (the need for more mortgages), lenders want to make loans because there's an estimated $2 trillion in excess funds lying idle in the system.
Third, existing home sales – a major source of loan demand – are significantly below 2013's levels. The National Association of Realtors said that annual home sales were down 5.3 percent as of August 2014. That's a difference of roughly 265,000 transactions. In contrast, as of August new home sales rose to 306,000 units versus 300,000 last year, a two percent increase. (This wasn't the headline though. Instead, much was made of the fact that new home sales in August had reached an annualized rate of 500,000 units without mentioning that sales for the year were pretty much level).
Excess capital and fewer loans bode well for borrowers because the lending system has a lot of fixed costs. This means lenders do best with high volumes of originations – and originations today are down. For instance, as of June the FHA had insured 567,000 loans so far in fiscal 2014 versus 1,060,000 during the same period last year, a tremendous reduction. It's not just the FHA: as of the second quarter originations were down substantially with many lenders.
Benefits for Borrowers
For borrowers, the problems faced by the lending system – too much cash and too little production -- translate into three benefits:
- Rates are low by historic standards.
- Average credit scores are dropping. For instance, in May 2013 the average credit score for a successful loan application was 743, an average that was down to 727 in August according to Ellie Mae. These are just averages, by definition a lot of people are getting loans with lower scores.
- Lenders are welcoming the return of borrowers who were once shunned, those with short sales, foreclosures and deeds-in-lieu of foreclosure. For example, the FHA now has a "Back To Work" program that can help qualified borrowers return to the mortgage system in as little as 12 months.
For borrowers the right strategy is take advantage of today's marketplace to finance and refinance if it's in your best interest to do so. Certainly there's no shortage of lenders who would be happy to discuss the latest rates, only a shortage of borrowers.