Ben Bernanke’s Christmas Gift: Mortgage Refis

Mortgage applications jump after Fed moves send rates plummeting.

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Masses of homeowners are looking to take advantage of the present Fed Chief Ben Bernanke recently slipped under the Christmas tree: lower mortgage rates.

As a result of two recent announcements by the Fed--that it would buy Fannie and Freddie debt and mortgage backed securities and might even purchase long-term Treasury bonds--average 30-year fixed mortgage rates dropped more than a half point, from 5.99 to 5.47, during the week ending November 28, according to the Mortgage Bankers Association.

The lower rates triggered a flood of refinancing applications. “The Refinance Index increased 203.3 percent to 3802.8 from the previous week and the seasonally adjusted Purchase Index increased 38.0 percent to 361.1 from one week earlier,” the MBA said in the report. “The refinance share of mortgage activity increased to 69.1 percent of total applications from 49.3 percent the previous week.”

Mike Larson, real estate analyst at Weiss Research, said the survey makes clear that the Fed got “quite a bit of bang for its buck” form its recent actions. “We just saw the single-biggest weekly rise in applications in the history of the group's index, which dates back to 1990,” he said in a report.

Still, there is good reason to treat the results with caution, Larson said in his report:

In simple terms, the Fed gave mortgage holders and home shoppers an early Christmas gift. But let's qualify the data a bit here. Conversion rates (submitted applications that actually turn into closed loans) are lower today because qualifying standards are tighter. Many borrowers who apply for loans will also likely find they don't have the equity to refinance, given the decline in home prices. And as long as unemployment is climbing and the economy is weakening, the impact on the home PURCHASE market should be much more muted than the impact on the REFINANCE market. Indeed, purchase applications rose at a relatively modest pace compared with refinance apps.

The point is well taken. While mortgage rates are very attractive--and could end up going even lower from here--not everyone will be able to take advantage of these rates because lending standards have (thank goodness) increased significantly form the loose days of the housing boom. Remember: to take advantage of today’s most affordable rates, you will have to be able to document your income, have good credit and a down payment. If you bought a home in the 1980s, that won’t seem unreasonable at all. But it’s a big change from just a few years ago.

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