Refi Boom? Banks Not So Sure

In what's been called the worst housing crisis since the Great Depression. Home prices are sliding, foreclosures are mounting, and lenders are making fewer and fewer new mortgage loans.

The environment has brought untold pain to Wall Street, where lucrative mortgage-related business has dried up for once high-flying banks, which are now additionally burdened with bad debt on their books. And as the housing market continues to slump and the Federal Reserve slashes interest rates to stem a deepening economic downturn, some lenders are looking to mortgage refinancings as one way to boost loan production volumes during a challenging time.

Normally, refi waves typically come as the central bank cuts rates. Yet despite 225 basis points in cuts since September, mortgage rates are rising, not falling. Add concerns about inflation and general economic uncertainty, and many observers say it is unclear if the brief, modest pickup in the refi business seen at the start of 2008 can gain a foothold.

"[T]he market is very choppy right now ... so all the benefit or perceived benefit the Fed gave us seems to be mitigated," says Michelle Ashworth, Wachovia's(WB Quote) head of secondary mortgage marketing, who says the bank "saw a nice little lift" in refis after the Fed cut rates 125 basis points in January.

"I think the real question is -- is there a directional refi surge going on or was that a one-time blip? It's very hard to tell right now what will and will not be sustained," she says.

The news does not bode well for thousands of borrowers who are either stuck in subprime adjustable-rate loans expected to reset several percentage points higher this year or those who find that their home values have dropped significantly -- in some cases to a point at which they owe more on the mortgage than what the house is worth.

Details, Details

How the refi business performs this year will depend on several factors. Final details must be sorted out regarding a federal bailout program designed to stem the flow of defaults and foreclosures cascading through the housing sector by freezing -- albeit temporarily -- certain mortgage rates. So too must a myriad of legislation and reform proposals made by Congress and industry participants to help borrowers refinance into better-quality loans, such as by modernizing the requirements on loans backed by the Federal Housing Authority.

Plus, as the credit crunch lingers, lenders are levying extra scrutiny on whom they offer loans to these days, making it tough on some borrowers looking to refinance their mortgages.

"Applications aren't getting funded because the borrowers aren't meeting the underwriting criteria," says Tom LaMalfa, a managing director of Wholesale Access, a residential lending market research firm. "We're guessing only six out of 10 borrowers who apply [for a loan] get refinanced."

But the Fed could breathe new life into refis if it continues to cut interest rates. The central bank's Federal Open Markets Committee is scheduled to meet next on March 18.

Applications for mortgage refinancing got a major boost after the Fed, in an unscheduled meeting on Jan. 22, surprisingly slashed the federal funds rate by 75 basis points to 3.5%. Slightly more than a week later, at its regularly scheduled meeting, the Fed made an additional 50-basis point cut to 3%. Refinance applications comprised 73% of total mortgage applications for the week ending Jan. 25, according to the Mortgage Bankers Association.

Going Up

But since then, rates have been steadily rising and refi applications dropping.

For the week ending Feb. 28, rates on a 30-year fixed loan averaged 6.24%, compared with 6.04% a week earlier and 6.18% this time last year, according to Freddie Mac(FRE Quote). Average rates were below 5.5% the week following the Fed's surprise rate cut in January.