Mortgage Refinancing Sparks Spending
When John and Corsair Thurman of Owasso, Oklahoma, heard they could cut almost two full percentage points off their 8.5 percent, 30-year mortgage, they jumped at the chance.
The Thurmans took advantage of a two-year low in mortgage rates to cut the term of their mortgage in half and skip a monthly payment of about $850. “We’ll probably spend the extra money on Christmas presents for our two boys,” said John Thurman, a 40-year-old aircraft factory worker.
The Thurmans aren’t alone. Falling mortgage rates over the past eight months have sparked a refinancing boom that economists say may boost overall consumer spending in 1998 by a quarter of a percentage point higher than earlier estimates.
The number of consumers seeking to refinance their home loans is now at an 18-month high, according to the Mortgage Bankers Association of America. And the “refi” boom is likely to continue well into 1998 while yields fall on U.S. Treasury bonds and notes, which provide the basis for mortgage rates, as investors seek safe securities in reaction to the Asian financial crisis.
This year, about 5.6 percent of the $4.106 trillion in outstanding mortgage debt will be refinanced, according to Fannie Mae, the largest buyer of U.S. home mortgages. That figure should rise to 6.3 percent of $4.380 trillion mortgage debt outstanding next year, Fannie Mae estimates.
While the refinancing wave brightens the outlook for consumer spending over the next six to 12 months, that doesn’t mean it will eclipse 1997’s levels.
Consumer spending next year should rise by 2.3 percent, less than this year’s 3.8 percent increase, said David Berson, chief economist at Fannie Mae. Without the recent refinancing, spending would have risen by about 2 percent next year, he said. “Because of the refinancings, consumer spending will be boosted modestly, but it will still slow substantially from this year,” Berson said.
“The Asian crisis has been a blessing in disguise,” said David Lereah, the MBA’s chief economist. “It’s slowing the U.S. economy down and generating a flight to quality, which really brings Treasury yields down.”
Since peaking for the year at 8.18 percent in April, the average rate on a 30-year fixed-rate mortgage has fallen 111 basis points to 7.07 percent last week, according to Freddie Mac. That cuts the average interest payment on a $100,000 home loan by $76.34 to $670.01 a month, according to Bloomberg Analytics.
That’s not necessarily good for investors owning mortgage-backed securities, however. Faster refinancings rip away those securities from investors sooner than expected, forcing them to reinvest in new securities at lower yields. Bonds that trade at a premium to face value, which are backed by higher-rate mortgages, are most vulnerable, investors said.
Mortgage bonds gave investors a 9.39 percent return this year, lagging the 15.2 percent returns of the 30-year U.S. Treasury bond, according to Lehman Brothers Inc. in New York. That’s also below 1997’s 21.3 percent return from the Dow Jones Industrial Average.
About one-third of all outstanding mortgages could be refinanced at rates a full percentage point lower or more, said Mark Schlawin, a mortgage prepayment analyst at Donaldson, Lufkin & Jenrette Securities Corp. in New York. That amounts to about $1 trillion of loans, or more than $10 billion of savings for the borrowers, he said.
Another force making it cheaper for homeowners to refinance their loans is a drop in fees and closing costs. New computer systems have helped cut refinancing fees by an average $800 to $1,400 in the past three years, according to Fannie Mae.