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Demand to refinance US mortgages rose to its highest level in more than three years, boosted by the tailwind of record low interest rates.
The Mortgage Bankers Association’s weekly refinancing gauge rose 2 per cent from the past week, its highest point since April of 2009. This comes as mortgage rates have dropped more than a percentage point in the past year as a slowing economy and concerns in the eurozone have pulled US Treasury yields to record lows.
When interest rates decline and remain low, US home owners can refinance their fixed rate loans, usually for 30-years, and cut their borrowing costs. So-called refi demand has been accelerating this summer as long-term market interest rates have fallen, helped in part by the Federal Reserve buying Treasury debt under its Operation Twist policy.
In the past such activity has boosted consumer spending, however many US home owners are unable to qualify for new loans, due to tighter credit standards. Meanwhile lower house prices has pushed many borrowers into a position of having an outstanding mortgage that is larger than the value of the property, known as negative equity.
“The reality is that a lot of people can’t refinance their mortgages,” said Steven Ricchiuto, chief economist at Mizuho Securities. “The problem is that people who need lower borrowing rates can’t get that relief.”
Most US borrowers who are current on their mortgages pay a rate of more than 5 per cent according to recent data from CoreLogic.
The MBA said the average contract interest rate for 30-year fixed-rate mortgages dropped to a record low of 3.52 per cent last week. Fixed 30-year rate mortgages with conforming loan balances of $417,500 or less were steady at a record low of 3.74 per cent.
The MBA said the refinance share of mortgage activity increased to 81 per cent of total applications from 80 per cent the previous week. The MBA’s weekly survey covers three-quarters of the US mortgage market.