The government’s decision to quit issuing 30-year Treasury bonds, combined with fears of a weakening economy, is expected to trigger a new surge in mortgage refinancings that already had hit record levels.
By announcing last week that it will reduce the supply of long-term Treasury securities, the government has in effect increased demand for the bonds, driving down yields on 10-year Treasury notes, which determine mortgage rates.
“It’s the best of all worlds for consumers,” said Doug Duncan, chief economist for the Mortgage Bankers Association of America. With refinancings already running 20 percent above levels in 1998, the previous record year, “lenders are buried in volume,” he added.
By making it cheaper to borrow money, the low rates should help sustain home sales, whose strength has been a rare bright spot for the economy this year. The mortgage bankers group expects $1.85 trillion in total mortgage lending this year.
Of that, more than half, $960 billion, will be refinancings, and it’s no surprise why.
“Almost every existing outstanding mortgage that hasn’t been refinanced already is now refinanceable” at rates low enough to cover refinancing fees within a year or two, said Bill Gross, interest rate guru at the Pimco Funds in Newport Beach.
Gross sees a good chance the average for a fixed-rate 30-year mortgage could sink below 6.5 percent, a nearly unbreakable barrier in the past.
Indeed, Freddie Mac, the second-largest purchaser of home loans, reported last week that the average rate on a 30-year fixed mortgage is at one of the lowest levels on record: 6.56 percent. Only in October 1998, when rates averaged 6.49 percent, have they been lower in the 30-year history of Freddie Mac’s survey.
Fears about the global economy also figure to put downward pressure on rates. Three years ago, worries about foreign debt defaults caused a “flight to quality” by investors. Their rush to buy fail-safe U.S. Treasury securities drove rates down, causing a refinancing boom second only to the one seen this year.
Duncan believes that fears that Argentina will default on its debt helped drive the yield on 10-year T-notes last week to as low as 4.13 percent, a record, before it rebounded to 4.24 percent by day’s end.
The slide in bond yields has meant eye-popping low rates for borrowers willing to pay lenders upfront fees known as points, a popular way to lower mortgage rates.
The refinancing boom has buoyed the economy by boosting consumer spending. With rates so low and home prices up an average of 30 percent in the last five years, homeowners can reduce payments while increasing loan amounts, putting cash in their pockets. The Mortgage Bankers Association says these transactions will result in $50 billion in extra spending this year.
