With fixed mortgage rates hovering near record lows, a growing number of homeowners are capitalizing on the opportunity to refinance their loans into more affordable terms.
During the week ending September 28, overall application activity spiked 20 percent, according to a report from the Mortgage Bankers Association. This was caused, in part, by a 16.6 percent increase in refinancing, which accounted for 83 percent of the total application volume.
"Refinance application volume jumped to the highest level in more than three years last week as each of the five mortgage rates in MBA's survey dropped to new record lows in the survey," said MBA vice president of research and economics Mike Fratantoni.
However, mortgage records indicate there was a slight decline in the number of applications for the Home Affordable Refinance Program, which provides options for underwater and struggling borrowers. Fewer requests for this type of refinance could be an indicator households' financial situations are improving.
Meanwhile, purchase activity rose 4 percent from a week earlier, the report said. This could show that homebuying activity will remain elevated in the fall and winter months, though there is often a slowdown during this period.
Small financial institutions could suffer
The recent decline of fixed mortgage rates is a direct result of the implementation of QE3 by the Federal Reserve. This initiative injected additional funds into the bond market, and is meant to hold rates low in the near future.
Although this is positive for borrowers hoping to restructure their home loans so they carry more favorable terms, it could shrink the mortgage portfolios of small banks and credit unions, claims Credit Union National Association economist Bill Hampel.
"They will have assets on the books earning 4 percent or 5 percent replaced with loans that may only earn 3 percent," Hampel said. "It squeezes their net-interest income immediately."
As a result, many small institutions may be forced to sell off FRMs to larger lenders. In turn, the majority of new loans they originate may have to be adjustable-rate mortgages, as these are often higher-paying. Brokers and lenders at small institutions who do this may be able to reduce the risk often associated with low fixed interest rates.