Nearly 80 percent of all mortgage applications are for refinancing now, according to the Mortgage Bankers Association, a near-record level. Why is the figure so high? Two reasons. First, demand for refinancings is up because homeowners want to take advantage of the historic low interest rates to reduce their monthly payments. Second, there are still very few new purchases as the housing market tries to recover. “When rates go down, it doesn’t spur homebuying, it spurs refinancing,” says Guy Cecala, publisher of Inside Mortgage Finance.
The Mortgage Bankers Association says nearly 30 percent of refinancings are part of the federal program HARP 2.0, designed to let borrowers who are current on their mortgages refi even if they owe more than their home is worth. Under HARP 2.0, borrowers don’t have to go through a new application process if they refinance with the bank that already services the mortgage, and if the loan is guaranteed by Fannie Mae or Freddie Mac, explains Cecala.
Lenders have an added incentive to offer refinancings to existing customers—Fannie Mae and Freddie Mac don’t require lenders to vouch for the quality of the new mortgages, making it less likely that the lenders will be forced to buy back soured loans. That incentive has lenders scouring the databases of their customers to find borrowers who are eligible for the program, says Frank Donnelly, president of the Mortgage Bankers Association of Metropolitan Washington.
HARP refinances could lower monthly payments by 26 percent, estimate economists at the Federal Reserve Bank of New York. The White House bills refinancing as part of its effort to “heal the housing market.” When HARP 2.0 was announced last fall, the housing data firm CoreLogic explained that the program would have “little direct and immediate benefit” to distressed borrowers and housing markets. Instead, CoreLogic said, the benefit of lowering monthly payments for borrowers is more like an economic stimulus “on the order of several billion dollars.” Of course, the economy can use all the help it can get—whatever form it takes.