Refi Pickups Likely to Be Limited, Deutsche Bank Says
For all the hullabaloo now being directed towards a nascent refinancing boom among the mortgage origination community, evidence seems to be mounting to suggest that much of that refi demand won't likely translate into funded loans. Tighter underwriting standards and a large number of borrowers with homes worth less than they'd hoped for seem likely to keep many applicants from successfully refinancing their loans, researchers at Deutsche Bank (DB) suggested in a note to clients late Friday. DB researchers Mustafa Chowdhruy and Marcus Hule projected that prepayments will reach roughly 20 percent -- well short of the 60 percent prepayment level observed during a historic refi boom in 2003, and not enough to revive a sagging economy. "Primarily this is the result of falling credit quality of mortgages due to declining home values. LTV ratios have gone up, making many borrowers ineligible for a new refinanced loan," the analysts said. "In addition, borrowers’ FICO scores have deteriorated with the increase in the jobless rate and its effects on the timeliness of borrowers’ payments. Thus the effect on consumption is not likely to be substantial enough to revive the economy." Buttressing this view, sources in the primary market have suggested in recent weeks that the current fallout rate between applications and actual loans closed is well north of 50 percent. Which means that at least some researchers are taking issue with the idea that fixing housing and disjointed mortgage markets will be enough to right the ship of the American economy. Even a regulatory mandate that would see the GSEs possibly waive appraisals on streamlined refinancing transactions (see earlier coverage) would likely have a limited effect, Deutsche Bank's analysts said, perhaps raising prepayments by another 10 percent CPR. "[I]n order to implement a streamlined refi process through the agencies, the ultimate status of the agencies must be clear, since the process would force the agencies to adopt non-economic capital allocations," Chowdhruy and Hule suggested. "The end result would be a shift towards full nationalization of the GSEs." Beyond the GSEs, both analysts suggested that unlike the 2003-2004 refinancing episode, the current episode of refinancing activity is unlikely to lead to a net economic benefit, since borrowers don't have equity to extract. "It is unclear whether the government's encouragement of a refi wave would be positive for the economy as a whole," they said. Sources close to key regulators have suggested to HousingWire in recent days that the incoming Obama administration may be likely to deal with the "currently in-limbo" status of the GSEs sooner rather than later; it's a move that could potentially serve to disrupt at least some of the currently still-functioning aspects of the MBS market, depending on the actions taken to restore or break up the GSEs as currently consituted. Complicating matters, these sources said, were emerging problems within the Federal Home Loan banking system; as HW reported earlier, numerous Home Loan banks have suspended excess stock repurchases and cut or suspended dividend payments to member banks. Write to Paul Jackson at firstname.lastname@example.org. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.