U.S. homeowners are refinancing their mortgages and taking out new loans at a record pace, pouncing on the lowest borrowing rates in four years.
The Mortgage Bankers Assn. said its index of mortgage refinancing applications rose to its highest level ever last week, up 89% from a week earlier, and more than twice the level of a year earlier. The group's index for new mortgages also climbed to a record high, up 13.6% last week from the week before.
The Treasury bond rally that drove benchmark yields to record lows also pushed 30-year mortgage rates down to an average 6.89% last week, creating the best opportunity for refinancing since September 1993, according to Freddie Mac, the second-largest financier of U.S. home mortgages.
Homeowners with 30-year $100,000 mortgages fixed at 7.6%, the average rate last year, can now slash their monthly payments by refinancing and save $89 a month.
What's good news for homeowners and the economy, however, will likely upset the $1.8-trillion market for mortgage-backed bonds.
Mortgage bonds, which were little changed, are poised to fall as the flood of refinancings forces these securities into early redemption. That could erode investors' returns and would leave them with the prospect of buying new securities at lower yields. The typical investors are pension and mutual funds.
Refinancings were expected to jump, but no analyst at any of Wall Street's major securities firms had predicted this big of an increase so soon.