Rate Refinancing Is Back in Vogue.(Hedging)

Byline: Ted Cornwell

The focus of mortgage portfolio risk managers has been squarely on credit in recent months, but they'd better keep an eye on interest rate risk as well.

To the benefit of mortgage servicing hedge professionals, tighter underwriting standards in the wake of the subprime meltdown and housing bust have slowed prepayment speeds. Fewer consumers can qualify for a new mortgage today than could a few years ago, and that is keeping potential refinancing candidates in their current loan, and potential trade-up buyers in their current home. But with rates once again falling below 6% on 30-year, fixed-rate mortgages, all bets are off.

Data from Freddie Mac and the Mortgage Bankers Association suggest that already, interest rate declines are speeding up loan origination volume despite the weak real estate market.

In late November, the MBA found that the Fed's announcement that the Federal Reserve stood ready to buy mortgage-backed securities and the debt of the government-sponsored enterprises, a move that helped push down mortgage rates. The impact was felt immediately, according to the MBA. Economists there said that the average rate on 30-year home loan applications at the beginning of Tuesday, Nov. 25 was 6.06%, but the average fell 29 basis points to 5.77% by the end of the day. Other rate trackers, such as HSH Associates, showed an even larger one-day drop in mortgage rates. Freddie Mac found the 30-year average falling to just above 5.5% in early December, a point that approaches the most attractive financing in recent ...