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Refinancing taking up a greater portion of mortgage applications

September 14, 2011

| Money Rates Columnist

Current mortgage rates are the lowest they've been in decades, but the number of new mortgage applications is still dropping.

The Mortgage Bankers Association said last month that mortgage applications fell nearly 6 percent to the lowest level they've been since 1996. Sales of both new and existing homes continue to decline, with the former on pace this year to be they lowest they've been since 1963. Homes have lost about a third of their value in the last four years.

Still, the AP reported, low refinance rates mean that a higher percentage of those applying for a mortgage are refinancing an old loan to take advantage of a current mortgage rate that recently hit a four-decade low of 4.15 percent.

The Wall Street Journal said the wave of refinancing is putting a strain on some banks. The share of mortgage applications used by homeowners to take advantage of low refinance rates has risen to nearly 80 percent, AP reported, up from the 70 percent it owned just a month ago.

The Obama Administration would like to see more of that. According to the New York Times, the president is looking for ways to help homeowners with government-backed mortgages to take advantage of current mortgage rates and refinance quickly.

The Times said administration officials feel the lower refinance rates would put more money in consumers' checking accounts, savings accounts and money market accounts and give them more spending money. That, they feel, will help stimulate the economy.

Any plan to do that, however, would face opposition from investors who own government-backed mortgage bonds. Mortgage-backed securities don't return as much to investors when the loans are paid off early and refinanced at a lower interest rate. Some bonds are priced above their face value and can trigger losses to investors when they are paid off early.

Despite the national downturn in mortgage activities, applications are up in some parts of the country such as Washington, D.C., where many people hold government jobs and aren't as worried about unemployment as Americans in other parts of the country.

According to the Washington Post, credit unions around Washington have experienced a sharp increase in mortgage applications, and the percentage of those that are refinances is lower--around 70 percent. Pending home sales in Washington are up nearly 30 percent this year over last year.

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