ICS Magazine

Refinancing Wave Breaks as Rates Rise

July 30, 2003
NEW YORK (Reuters) - Demand for mortgage refinancings -- a lifeline for the anemic U.S. economy -- sank last week to lows not seen since last December, an industry survey reported on Wednesday.

Fewer consumers applied for loans to buy homes, and the jump in borrowing costs fanned concern among economists that a rapid rise in borrowing costs over the past six weeks may hobble the economic recovery.

Rates for 30-year loans, the most commonly used home mortgage, rose to 5.87 percent in the latest week from 5.72 percent in the previous week, according to the Mortgage Bankers Association of America.

Demand for refinancings as measured by the trade group's refinance index plummeted 32.9 percent to 4,145.8 in the week ended July 25. The percentage decline was the largest since January 2002, but in points it was the largest drop ever.

The refinancing index is at lows not seen since Dec. 20, 2002, and is now 58 percent below the record 9,977.8 set in the last week of May. "The drop in refi activity could be a major blow to the recovery if rates remain high," Chris Low, economist at FTN Financial, warned in a report. And economists at BNP Paribas pointed out that the drop "is a dent in household cash flow."

"The 30-year contract rate is at highs not seen since December 13 of 2002 when it was at 5.91 percent," said Douglas Duncan, the trade group's chief economist, adding "there is no question we're past the peak (in refinancings)."

The association also reported its purchase index, a measure of demand for loans to buy homes, fell 3.5 percent to 426.9.

Record home sales and refinancings have been a key support for a struggling economy in recent years because they encourage spending as owners outfit their new homes with furniture and appliances.

Low rates have allowed homeowners to cut borrowing costs by refinancing their mortgages. Many homeowners have squeezed equity out of their homes with the help of cash-out refinancings and used the money to pay down debt or spend it on goods and services.

In the first half of this year about $50 billion of consumer spending was due to cash-out refinancings, according to Freddie Mac. For all of 2002 the amount totaled $96 billion.