Last time, we asked Dr. Michael Seiler from The College of William & Mary to explain what impact fewer refinances will have on the market as a whole. This time around, we asked Dr. Anand K. Bhattacharya, professor of Finance Practice at the W.P. Carey School of Business at Arizona State University to explain why refinances declined in the first place and exactly what type of market conditions will bring them back. Below is the ninth installment of our Think Tank series.
Q: Why has refinance activity declined and what will bring it back?
Dr. Anand Bhattacharya, Ph.D.
Professor of Finance Practice at the W.P. Carey School of Business at Arizona State University
A: There are a couple reasons why refinance activity has fallen off: 1. Interest rates have been low for a fairly long period of time. Since June of last year, mortgage rates have slowly started increasing upwards. The rule typically is, as interest rates rise, the refinancing options obviously shrink. 2. The other side of the point is that we've had low interest rates for a fairly long period of time, so those who could refinance have already refinanced. I suspect as we go forward in time, mortgage volume will be more and more oriented toward purchases and less and less oriented toward refinance. Fewer ARMs thanks to QM rules It's good news and bad news when it comes to ARMs these days. Historically, before the QM rules came into existence, you would have expected more of an increase in adjustable-rate mortgages. ARM volumes tend to increase when interest rates are rising. But in this current rising-interest-rate environment, you have to superimpose all the different QM rules. The QM rules require mortgage lenders to be more stringent and require borrowers to be fully qualified, or to be fully qualified at the full index rate. The people who could qualify for an ARM today need to have much better credit and that will limit the amount of new ARMS on the market.