(Bloomberg News) Amy Haenner, a broker at Legacy Lending Group in Fort Wayne, Indiana, is processing eight mortgages this week. None of them are for home purchases.
A year ago, her business was evenly split between home-purchase loans and refinancings that reduce interest rates on existing mortgages. That's changed as a slowing U.S. economy curtails buying demand and encourages current owners to save cash by locking in near-record-low borrowing costs, she said.
"People are deciding to stay in place until the economy turns around," Haenner said. "That same concern for the economy is causing buyers to take a wait-and-see attitude."
About $783 billion of mortgages will be refinanced in 2011, according to a forecast released at this week's Mortgage Bankers Association conference in Chicago. The projection is more than double the group's estimate of $352 billion at the beginning of the year. Refinanced mortgages now account for 85 percent of home-loan originations, up from 70 percent six months ago.
The refinancing boom is combining with a U.S. jobless rate above 9 percent and a surplus of distressed properties to limit buyer demand for houses. People who refinance usually remain in a home for at least the time it takes to recoup fees and start seeing the benefit of a lower interest rate, and many stay longer as savings kick in. The National Association of Realtors estimates that homeowners now stay at the same address for at least a decade, compared with a 2006 average of six years.
Staying Put
"To fully recover the refinancing upfront fees, you generally would need to stay for three years or possibly longer," Lawrence Yun, chief economist of the Chicago-based Realtors group, said in a telephone interview. "Some people after a refinance may psychologically not want to move, after paying for the refinancing costs."
Fees and other costs of originating mortgages are near an all-time high of 0.95 percent of loan balances in August, second to March's 1 percent, according to data from the Federal Housing Finance Agency. The payback period is calculated by dividing the amount of fees by the monthly savings.
Monthly savings on a refi may amount to almost $300, based on a 1.5 percentage point change of interest rate on a $300,000 home loan. Over three years, that amounts to about $10,000.
"It's good for the economy to redeploy those dollars into consumer buying," Ron Peltier, chairman and chief executive officer of Minneapolis-based real estate company HomeServices of America Inc., said in an interview yesterday at Bloomberg's headquarters in New York. "We've seen the consumer's earning stream diminish in the last few years. By refinancing, it's like they're giving themselves a raise."