Business Columns & Blogs

Bill Virgin: Mortgage refinancing can be barometer of hyperlocal trends

We refinanced our mortgage. Hooray for us. But by that low standard, hooray for half of humanity, which seemed to have gotten applications in ahead of us, thus delaying our closing as we continued to make payments at an interest rate more than twice what the new loan would carry.

But eventually the paperwork made its way through the maze. Thanks to some gizmos that have been added to the system — scrawl your signature once on the screen of what resembles a grocery checkout stand credit-card reader and it appears in all the appropriate places on all the documents you were supposed to read — the closing is much faster and less painful than the days of, “Here’s a mountain of paper, here’s a pen, get to work.”

And with all that done, we have some time to contemplate the question that inevitably follows any noteworthy accomplishment: Now what?

Not so much “now what?” in terms of one family’s finances, although that’s significant at the personal level. More significant regionally, even nationally, is what this means at the macro-economic level, because what’s going on up there is the sum total of all those families’ decisions, and what happens at the metaphoric height of 30,000 feet winds up affecting each and all of us at ground level.

We’ve all known we’ve been in a refinancing boom. How much of a boom? In its most recent weekly report on mortgage activity, the Mortgage Bankers Association says refinancing accounted for 63 percent of total applications. If that sounds high, consider that the percentage is actually down, from 81 percent in the association’s report of a year ago.

The average interest rate, on the other hand, is up, from 3.76 percent on a 30-year fixed-rate mortgage (non-jumbo) in mid-August 2012 to 4.56 percent in the most recent report.

We can figure those two numbers — percentage of refis, average mortgage interest rates — are closely and inversely linked. Common sense, really. When the gap between the rate on existing mortgages and what’s charged on new ones narrows, the financial incentives and paybacks to refinance drop.

But it’s not a perfect relationship. The percentage of refis was bound to drop anyway; at some point you exhaust the supply of higher-rate mortgages that are still around to be refinanced.

The refi boom’s expiration date has been further hastened by the overall realization that the Era of Cheap Money, having helped create several bubbles including one in housing, has since done little to reinvigorate the economy. If people have neither the wherewithal nor the confidence to borrow (or the lender is too recession-scarred to actually make loans), then it doesn’t matter how little you charge on your loans. At some point the Fed will officially give up interest-rate stimulus. Interest rates are going up — have already, will go up more.

Now what?

There are multiple interesting ways this plays out. For lenders, the refi boom is both blessing (fee income) and curse (they’ve replaced higher-rate loans that earn more for lower-rate mortgages). The long-term effect of higher rates will be lower fee income from refis, and lower income from the new loans they’ve made. (It would appear borrowers have, for the moment, learned their lesson about adjustable-rate mortgages; MBA says ARMs represented just 6 percent of total activity.) At least they didn’t load up on loan processors and infrastructure to handle the flood of refi applications the way they did to handle the last housing boom. Umm, they didn’t, did they?

Their options include: making up income through increased volumes of loans for purchases of new and existing homes at rates that are still attractive in historical terms (kids, ask your parents or grandparents about the rates they were paying in the early 1980s); or swearing off home lending and seeing if there’s better, more predictable and secure money to be made in commercial and business lending.

How they react has an effect on the economy, and you. So do the collective decisions of everyone who has cut the monthly mortgage with a refinance. The theory — or maybe it was desperate hope — has been that people will take the money they’re not spending on a mortgage and spend it other places, thus spurring the economy. A lot of Americans, however, will choose to pay down debt, adjust their spending to match the new reality of reduced incomes, and save whatever might be left.

Trying to sift through economic data to discern when and how these shifts are taking place, and how they’re affecting you, is a frustrating, time-consuming exercise, and if you do find some useful signals the trends have already occurred.

Fortunately for you, you have a much easier, more timely method of reading the economy.

Refinancing, like the weather, is a favorite conversation topic. Weather is perpetual. Refinancing booms, however, are not. When you notice you’re no longer swapping tales about mortgage rates with friends, neighbors and coworkers, there’s your indicator something’s happening.

But say, have I told you about the great deal I got ... ?

Bill Virgin is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at