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