Lenders Struggle to Increase Retention as Refis Soar.(mortgage refinancing boom)(Brief Article)

The 30-year mortgage rate fell nearly 100 basis points between early November and mid- February, sparking a refinancing boom that threatens to impair the value of many servicing portfolios and puts to the test efforts to improve retention.

During the first six weeks of this year, the 30-year mortgage rate never exceeded 7.15%, according to Freddie Mac. These falling mortgage rates have caused an unexpectedly high spike in prepayment rates for mortgage-backed securities, a trend that could portend trouble for servicers.

Just how much of outstanding mortgage debt is at risk of runoff remains an issue. Robert Van Order, chief economist at Freddie Mac, said that about half of outstanding mortgages were candidates to refinance when rates dipped down to 6.98% in the week ending Feb. 9.

Moreover, both he and David Berson, chief economist for Fannie Mae, said there is room for rates to edge down further. Mr. Berson said he expects the 30-year mortgage rate to hover in the 6.76% to 7.00% range through the second quarter of this year before starting to move upward. Mr. Van Order said he also sees indications that rates could keep drifting downward for a while.

"The market seems to think the Fed will make another move of 50 basis points or more," he said in mid-February. "I can certainly imagine rates going below 6.75%."

People with 7.5% mortgages faced "a close call" about whether or not they should refinance at 7%. But those with an 8% home loan faced a strong case in favor of refinancing, he said. Rates peaked last year at about 8.5%.

Economists at both the government sponsored enterprises believe that the refinancing boom this year will likely be smaller than the one that occurred in 1998, in part because the universe of loans outstanding does not include as many high rate loans as it did then.