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Lending

Why aren't more Fannie Mae borrowers refinancing?

The sideline psychology

February 7, 2014
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Deutsche Bank (DB) analysts Doug Bendt and Jeff Ryu noticed something unusual happening this year.

Mortgage rates are at a five-week low, getting closer and closer to 4%. So any homeowner sitting in a mortgage 4.5% or above could benefit from refinancing in theory. But among the government-sponsored enterprises, notably the larger Fannie Mae, the largest drop in refinacings came in the 4.5% to 5% range.

The aggregate drop in refinancings for January is 20%, Bendt and Ryu report. For some recent vintages of 4.5% mortgages it goes up to 28%. In the 5% range, there is up to a 30% drop in the rate of refinancing.

And the trend can get alarming further up the coupon stack. There is also a drop in refinancings among homeowners with a mortgages above 6%.

Why don't they want a cheaper deal?

According to the Fannie Mae National Housing Survey, approximately 40% to 50% of eligible mortgage borrowers said they have not refinanced the mortgage, despite the opportunity for potentially significant savings.

Li-Ning Huang, an economic and strategic researcher blogged the reasons that may be behind this sideline psychology. Huang and her team examined factors associated with refinancing, such as years in a home or a decline in mortgage rates, using the results from said housing survey. The researchers then cross-pinned those patterns against the intent of homeowners to refinance, such as when they get a raise or think mortgage credit is improving.

And they think they've figured out what's holding homeowners back.

"Findings suggest that a better awareness of one’s financial situation could encourage consumers to consider refinancing and to take action," Huang wrote. "In addition, resources and tools that help build financial literacy and awareness could lead to higher rates of refinancing."

In the conclusion, Huang admits there could be other, unmeasured factors associated with the basket of homeowners who shun refinancing, despite savings potential, such as a lack of savings and a perception of higher closing costs.

Huang also stops short of effective means of educating borrowers, indicating that as a securitizer of mortgages, Fannie Mae can only comment on what's happening but cannot speculate on how to change that.

Therefore, at this point, whether or not a borrower refinances could be up to the lenders, and how well they communicate information to their clients.