Ben Bernanke's Mortgage-Refi Nationby
Well, that didn’t take long. It’s been less than a month since the Federal Reserve announced plans to buy $40 billion of mortgage-backed securities a month for as long as necessary to spur lending and boost employment. Since then, mortgage interest rates have fallen to the lowest level on record—the average 30-year loan stood at 3.53 percent as of Sept. 28—driving refinance applications to jump to their highest level since 2009, according to the Mortgage Bankers Association.
Borrowers are refinancing at an annualized rate of 22 percent, according to Lender Processing Services. At this rate, more than one in five borrowers will refinance over the next year. Borrowers who have at least 20 percent equity in their homes are even more likely to refinance. Among those homeowners, one in three will refinance in the next year if the current pace continues.
Refinancing is normally not an option for borrowers who owe more than their home is worth. But they have been getting into the act this year, thanks to the Obama administration’s Home Affordable Refinance Program, which rewards banks for working with underwater homeowners. Since the start of 2012, there’s been a 65 percent increase in refis for borrowers who owe at least 20 percent more than their homes are worth; HARP now accounts for about a quarter of all refis.
With rates so low, some borrowers are taking out shorter-term loans that let them pay down their debt quicker. Gone are the days people take out cash when they refinance. In almost a quarter of all refinancings in the second quarter of 2012, homeowners ponied up cash to reduce the principal on their loans, according to Freddie Mac. A further 59 percent kept their loan balance the same—the most ever on record.
Lower interest rates free up real monthly cash flow for homeowners. In the second quarter—before the Bernanke-induced drop in rates—the average refinancing cut the homeowner’s interest rate by 28 percent, the biggest reduction in the 27 years since Freddie Mac began tracking the data. That means a homeowner with a $200,000 loan would save about $2,900 in their first year, Freddie Mac says.
All this refinancing activity is fine for the economy—lower monthly costs could help boost consumer spending–but it’s not Bernanke’s real target. He said (PDF) at a press conference last month: “You get more benefit when people buy homes. … It’s the purchases of new homes that generate the construction activity, the furnishing, all those things that help the economy grow.” Though home sales are starting to rebound slowly, it’s still hard for people with less-than-stellar credit to get mortgages. So for now, while low interest rates may be relieving the consumer debt burden for some, their boost to the overall economy is limited.