The U.S. mortgage market is heating up with news this quarter of the government?s new Home Affordable Refinance Program (HARP), and more prospective homeowners are filling out mortgage loan applications, says the Mortgage Bankers Association (MBA).
According to the MBA, its seasonally-adjusted index of mortgage loan application activity rose by 7.5% this week. This index includes not only home mortgage loan applications, but also refinancing applications, which explains the bulk of the increase; taken separately, activities for new home loan applications only rose by 0.1%.
In essence, more American homeowners are trying to pursue money-saving refinancing so they can take advantage of historically-low interest rates that are currently hovering around 3.875% for a traditional 30-year fixed-rate mortgage (and 3.750% for a 30-year fixed-rate loan through FHA). This increase in mortgage loan activity has come as a result of loosened loan restrictions on the part of Fannie Mae and Freddie Mac.
For investors who play in the mortgage bonds market, the news is troubling because of the impact it could have on their investments. Investors who bet against refinancing could suffer if HARP 2.0, as it has been called, is successful because they are in essence betting against the prospect of homeowners paying on their mortgage loans. Specifically, investors who are heavily into credit default swaps benefit if mortgage payments are not made on time and the homeowners go into default.
With higher levels of refinancing, more homeowners presumably will avoid going into default (and foreclosure), which will impact the performance of mortgage debt bonds and investors who have those assets in their portfolio.
Still, the news is good for homeowners and the domestic real estate market, which has endured slack demand for four years straight. The minuscule 0.1% increase in weekly home loan applications is not a strong sign of progress, but most believe a rejuvenated refinancing market will eventually spur increased interest in home-buying ? and could also help reduce the number of foreclosure listings that enter the market this year.
Principal write-downs and other similar loan modifications are also potential threats to these investors, but most analysts agree that such measures are needed to resuscitate the domestic market and encourage homeowners to stay in their homes and avoid foreclosure. Low interest rates will be the norm for at least the next two quarters, thus continuing to encourage buying.
Source: http://www.moneypress.com/more-homeowners-apply-for-refinancing-mortgage-bond-investors-worry.htm
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