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Mortgage Refinancing And The Fed's Perverse Incentives

Tyler Durden's picture


The last two weeks have seen the largest drop in mortgage refinancings in over 7 months. While refis are trending generally higher as mortgage rates drop to all-time-record-lows, there is an odd reaction evident in the data. Each time interest rates tick up even modestly, the rate of refinancings plunges violently. In a sane world of rational actors, we would expect a rush of refinancings at the first sign of a rise in interest rates as they scramble to lock-in the last best deal. However, in our surreal world of extreme balance sheet inflation and seemingly infinite zero-interest rates from the Fed, the crowd (instead of seeing a blip up in rates as a signal to act) decides to hold off from refinancing as they await rates to continue trending down/lower (as per The Fed). So, does the Fed need to signal that rates will be rising soon, and lift its easing pedal to remove the perverse incentive that ZIRP has enabled, in order to improve the housing market (or household balance sheets)?

Mortgage refinancings vs mortgage rates (inverted) - each blip up (down on the chart) in rates causes a violent drop in refinancings...

and the latest tiny blip up in rates has caused the most violent drop in refinancings in over 7 months...


Charts: Bloomberg

Your rating: None

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Thu, 07/05/2012 - 11:20 | 2588983 Cursive
Cursive's picture

You could write a text book on the Law of Uninteded Consequences with examples from the last 20 years of government and shadow government actions.

Thu, 07/05/2012 - 11:23 | 2588996 FL_Conservative
FL_Conservative's picture

You got that right.  I think the Fed would realize that if they weren't so concerned about protecting their masters.

Thu, 07/05/2012 - 13:06 | 2589403 hidingfromhelis
hidingfromhelis's picture

I'm sure they know; caring is another matter.

Thu, 07/05/2012 - 11:27 | 2589011 Turin Turambar
Turin Turambar's picture

One could write a magnum opus with the data from the last 20 years. One only needs data from the last four years to write a book.

Thu, 07/05/2012 - 12:03 | 2589150 vast-dom
vast-dom's picture


Thu, 07/05/2012 - 18:20 | 2590335 CreativeDestructor
CreativeDestructor's picture


Thu, 07/05/2012 - 11:37 | 2589054 LawsofPhysics
LawsofPhysics's picture

Correct.  Moreover, technicals/fundamentals no longer matter.  The surviving crony capitalists/fascists will make the numbers be what they want them to be.  The republic is dead, time to reset.

Thu, 07/05/2012 - 16:10 | 2590056 LongBalls
LongBalls's picture

This chart is a reflection of Americans inability to refinance on rising rates not fear in a way that makes sense. Those Americans worthly of refinancing are not coming off the cash to subsidize the difference in 80% LTV. When rates rise they say screw it. Americans are becoming wise! WTH not ride the banks at 3.5% or even 5% over 30 years and sit on more cash. Most don't have enough to pay off all their debts so why try only to run out of cash and still face collectors. The world is insolvent people.......inflation is the only way out. And I don't see it getting passed down to employees either. The credit crunch is here. The debt bubble WILL POP.

Thu, 07/05/2012 - 11:21 | 2588987 ITrustMyGut
ITrustMyGut's picture

Please..let the LIBOR scandal escalate and be the bomb that ENDS THE FED *not holding my breathe*

Thu, 07/05/2012 - 11:37 | 2589049 optimator
optimator's picture

Audit or no audit, Bernanke will be the first FED Chairman laughed out of office.  He can then either live on his gold cache or take the part of Elmer Fudd in the broadway play.  Of course he'll have to shave that beard.

Thu, 07/05/2012 - 12:06 | 2589161 bankruptcylawyer
bankruptcylawyer's picture

unless you have some real specific understnading of how this could operate to 'end the fed'---i'm calling you a moron for thinking its possible. 

Thu, 07/05/2012 - 11:21 | 2588988 FL_Conservative
FL_Conservative's picture

Its hard for most ordinary people to refi when their LTV doesn't pencil.  Won't matter how low rates go.

Thu, 07/05/2012 - 11:38 | 2589067 viahj
viahj's picture


also, the pool of eligible refis is evaporating.  those who did refi in the low-mid 4's don't see the cost benefit to get 3.500%.

Thu, 07/05/2012 - 11:44 | 2589096 somecallmetimmah
somecallmetimmah's picture

Probably true.  The wife & I just locked in ours at 3.375%

Who would ever thought that possible 10 years ago?  Absurd.

Thu, 07/05/2012 - 12:05 | 2589153 greensnacks
greensnacks's picture

And most everyone that had a reasonable LTV already refinanced into lower rates. The only incentive to refinance again is if rates go down more. If rates go up, there just isn't enough new customers that are still stuck with higher rates and reasonable LTV to warrant refinancing.


Thu, 07/05/2012 - 11:25 | 2588998 Everybodys All ...
Everybodys All American's picture

Of course they do. In the mean time they also need to exit their severely bloated balance sheet. Good luck with that. Bernanke has created such a mess and yet how many people are willing to anoint him as some kind of savior. He is the one who created this mess and now if anyone expects him to extracate himself from this unscathed you are kidding yourself.

Thu, 07/05/2012 - 11:36 | 2589048 Solon the Destroyer
Solon the Destroyer's picture

This isn't inflation, it's deflation.

This is the reason why businesses aren't investing either.  Why would you when future financing will be cheaper yet?

The Fed is trying to inflate yet all their efforts add more deflationary harmonic resonance into the system.  Only a matter of time before the fiat bridge collapses... and gold goes into permanent backwardation.

Thu, 07/05/2012 - 11:40 | 2589076 LawsofPhysics
LawsofPhysics's picture

"and gold goes into permanent backwardation."

Paper or physical, and relative to what?  If you are sitting on physical PMs, odds are your purchasing power will be just fine regardless of the deflationary environment.  Fucking bring it.

Thu, 07/05/2012 - 11:46 | 2589098 crawldaddy
crawldaddy's picture

Purchasing power grows with deflation, you just have to be lucky enough to be among the few that has some money.  PMS will not do well in a deflationary environment, neither will real estate.

I think deflation is much more realistic, than inflation.  Inflation will need the average joe to be flooded with cash, in reality, household income in going DOWN, that deflationary.


The govt pumps all this money into the system, and it just sits in never ever banking spreadsheet land.  Never to reach the real world.

Thu, 07/05/2012 - 12:37 | 2589263 Solon the Destroyer
Solon the Destroyer's picture

Historically, PMs do very well in debt deflation. Historically they have done poorly in periods of typical long term inflation.  Inflation all the way from 1988-2000, nary a move in gold.  Deflation since the dot.com crash with the Fed trying it's damnedest to stave it off and since then gold has done very well. 

The drop in interest rates that accompanies deflation makes buying gold attractive while the debt deflation itself brings into question the solvency of a nation's banks, the sustainability of its ponzi debt currency and thus the solvency of the nation itself.

If you believe in deflation, Hold Gold.

Thu, 07/05/2012 - 12:27 | 2589223 Solon the Destroyer
Solon the Destroyer's picture

Permanent backwardation by definition must refer to physical.

It refers to the phenomenom where you will not be able to obtain physical gold at ANY fiat price... All gold will be hoarded.  This is what will happen when fiat currencies hit the last stage of self-destruction.

It is an extension of Al-Maqrizi's work which we know as Gresham's Law.

Thu, 07/05/2012 - 11:39 | 2589069 Bicycle Repairman
Bicycle Repairman's picture

Real estate bottom?  With every tick up in mortgage rates there will be a new bloodbath.

Thu, 07/05/2012 - 11:48 | 2589110 crawldaddy
crawldaddy's picture

ironically, the best time to buy real estate is when interest rates are high.

Thu, 07/05/2012 - 12:41 | 2589283 GMadScientist
GMadScientist's picture

and principal is low...

Thu, 07/05/2012 - 11:41 | 2589072 crawldaddy
crawldaddy's picture

how many times can you refinance?  after awhile its dimishing returns and just doent make sense. Im at 5.5% still but only have a few years and my loan is paid off, My brother in law, a mortgage broker ran the numbers and said, dont refi, He said, he would make money, but it makes no sense for me, juts finish off the loan on schedule and be done with it. Now Iam sure I only got an honest assessment because we are friends and family.

Thu, 07/05/2012 - 11:41 | 2589083 LawsofPhysics
LawsofPhysics's picture

but then the paper-pushers will have nothing to do!  They would have to actually work for a living.

Thu, 07/05/2012 - 12:45 | 2589307 GMadScientist
GMadScientist's picture

Hmmm...never tried that...theoretically plausible but....

Thu, 07/05/2012 - 12:44 | 2589297 GMadScientist
GMadScientist's picture

He's right!

Why line the pockets of middlemen to save next to nothing all the while enduring grief over whether or not the bank will hold up their end?

If you can afford your note (and will actually have clear title), stay the course (or have fun and play hardball with them and enjoy the mort money instead :).

Thu, 07/05/2012 - 11:40 | 2589074 walküre
walküre's picture

I have a better idea.

Go full retard and have NIRP actually pay the mortgagee for the effort of taking the debt. There's no upside to the lender, so how about creating some upside for the borrowers? You know.. take that $500,000 mortgage and get paid when you continue to make payments. The negative interest rate will be directly applied towards the principal. Sorry, no you can't get a pay out on that.

I know the snake would sooner eat her tail.

Thu, 07/05/2012 - 11:43 | 2589090 Village Smithy
Village Smithy's picture

That's the deflationary mindset creeping in. "I don't need to act now conditions will improve in the future." Bernanke has wrung the last spare consumer discretionary dollar from the system.

Thu, 07/05/2012 - 11:46 | 2589104 dark pools of soros
dark pools of soros's picture

this is funny to watch.   I did a refi in '10 to 4.25 a year after getting the mortgage at 5.5.  Back then people did jump when they saw the rates creep up.. the sheep do learn where they are prodded to go..  give me sub 3% and I'll refi again



Thu, 07/05/2012 - 11:47 | 2589109 Meesohaawnee
Meesohaawnee's picture

it doesnt matter.. You can pay ME the 3% i wouldnt buy a house at all. More silly propaganda. If people are concerned as they truly are the fish aint biting.. Here in Chicago? Who is crazy enough to be at the mercy  of King Rahm. pick pocketing you ever time  a desperate broke city wants to give a handout to a banker that owns the cubs. Its not about price. Its about being locked in jail just waiting for the to come and steal more.

Thu, 07/05/2012 - 11:52 | 2589128 crawldaddy
crawldaddy's picture

you buy a house to live in it, as an investment, its risky and even dumb if you ask me.

Deflationary headwinds, growing pool of bad tenants, rising property taxes, always rising upkeep, more extreme weather events..... who needs the headaches..

Thu, 07/05/2012 - 12:49 | 2589328 GMadScientist
GMadScientist's picture

Crackhead neighbors (growing pool of bad tenants), rising rent, slumlord service and upkeep, and by the way, you're evicted because Leona didn't pay her note.


Thu, 07/05/2012 - 12:47 | 2589318 GMadScientist
GMadScientist's picture

Exactly. There is no interest number low enough to make me ignore the degree to which the principal is over the trend line. Not gonna happen.

Thanks for playin', Ben! GG, motherfucker.

Thu, 07/05/2012 - 13:07 | 2589409 dark pools of soros
dark pools of soros's picture

how's section 8 or mom's house treating you?   trailer maybe?   tent city?  


or just a grumpy apartment dweller eaves dropping on your neighbor all day


Thu, 07/05/2012 - 11:50 | 2589116 LMAOLORI
LMAOLORI's picture


Investors With Ties To Buffett, Soros, Obama Plan Mortgage Eminent Domain Grab



Cities Consider Seizing Mortgages


Thu, 07/05/2012 - 12:06 | 2589159 monad
monad's picture

Oops, your manacle is broken. Please put on this new manacle.

Thu, 07/05/2012 - 12:11 | 2589174 Snakeeyes
Snakeeyes's picture

I track mortgage refis every week and with 14 Administration programs and Fed twisting the night away, THIS is the best they can do?


Yup, a low velocity recovery. Notice Bernanke never discussses velocity?

Thu, 07/05/2012 - 12:25 | 2589218 Ned Zeppelin
Ned Zeppelin's picture

 A statistic I'd like to see:  the "tranches" of actual interest rates people are paying on their residential mortgages, by rate increment and then the dollar amount in that increment. I bet a large number of mortgages are at much higher rates.

I say that because there are a large number of mortages out there which are simply underwater for purposes of getting these rates (the 2004-2007 vintage mortgages) and they cannot be refi'd to these lower rates.

I think the correct way of thinking about this is that those who could refi'd already have.  So when you see rates going up, that's why you see the collapse in apps.  Those who can are already in at the lower rate. Those who cannot, have not and will not get the opportunity to do so.

Thu, 07/05/2012 - 12:26 | 2589224 slewie the pi-rat
slewie the pi-rat's picture

you got a job and want to buy a house: go buy a  house

and have a nice day!

Thu, 07/05/2012 - 12:39 | 2589276 GMadScientist
GMadScientist's picture

How would encouraging refinancing materially improve the housing market?


Thu, 07/05/2012 - 13:45 | 2589546 Strut
Strut's picture

increased disposable income = increased economic stimulus = increased housing demand

Thu, 07/05/2012 - 14:37 | 2589714 Dirtt
Dirtt's picture

"So, does the Fed need to signal that rates will be rising soon?"

I'm sure someone else came to this conclusion but signaling an end to ZIRP will spook the mortgage industry more not refi candidates. Qualified refis have had all the time in the world to lock in rates. A rise in rates will put past refis closer to par or in-the-money and shut everyone still left who is qualified out of the market forever.

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