Near-Record Low Rates Trigger Refi Wave Among US Homeowners

U.S. mortgage refinancing is on the uptick as fears about fluctuating global markets cause a drop in interest rates, the Financial Times reported Sunday (Aug. 18).

As more people invested in the safety of U.S. Treasuries, yields and mortgage rates dropped. The average interest rate on a 30-year fixed-rate mortgage was 3.6 percent, close to the all-time low of 3.3 percent in late 2012.

The first two weeks of August saw a 12 and 37 percent boost, respectively, in the number of mortgage refinances, according to the Mortgage Bankers Association index of mortgage refinance activity.

“Big banks’ mortgage businesses are a lot smaller than they used to be,” Jeffery Harte of Sandler O’Neill told FT. “I’m thinking of [the refi wave] more like a partial offset to [lending margin] pressure, as opposed to a meaningful earnings boost.”

Transactions fees from refinancing won’t be sufficient to offset the lower lending margins, analysts said.

Non-traditional mortgage lenders like Quicken Loans are now taking a bigger market share as traditional financial institutions opt out. Nonbank lenders — or Shadow banking — now write 60 percent of Freddie Mac mortgages, according to Inside Mortgage Finance.

Shadow banking has seen its assets hit $52 trillion, despite the fact the sector poses significant risks. Subjected to less regulation than traditional banks, these companies have seen a 75 percent jump from 2010, the year after the financial crisis ended. The nonbank sector played a large part in the crisis because it gave loans to under-qualified borrowers, while also providing financing to many of the investment instruments that collapsed at the same time as subprime mortgages.

Data has also shown that shadow banking’s share of “collective investment vehicles,” which includes bond funds, hedge funds, money markets and mixed funds, have increased by 130 percent to reach $36.7 trillion. In addition, nonbank financials have grown 61 percent to $185 trillion. By comparison, traditional bank assets had a 35 percent boost to reach $148 trillion during that same period.