It doesn't qualify as a boom quite yet, but it's shaping up to be at least a mini-boom: American homeowners applied to refinance their existing mortgages last week at a pace faster than at any time since February of 2005.

A key reason is that fixed rates on 30-year loans dipped to an average 6.15 percent, the lowest they've been in 10 months. Rates could drop even further over the coming months, say some economic analysts. One top Wall Street economist, James Glassman of JPMorgan Chase, says he would not be surprised to see 30-year rates slip as low as 5.75 percent in the near future -- especially if crude oil prices continue to decline and the rate of inflation as measured by the Consumer Price Index remains low.

Last week crude oil prices dropped and the CPI registered a 0.5 percent decrease -- both of which helped trigger lower interest rates in the global bond markets.

Roughly one of every two new mortgage applications last week was to refinance an existing first mortgage, according to the Mortgage Bankers Association of America. Many of those refinance applicants are homeowners who want to bail out of payment-option and interest-only loans that face major rate "resets" upward in the months immediately ahead.

Others have large floating-rate home equity credit lines that are now in the 8 percent to 8.5 percent range or even higher. With 6 percent fixed-rate mortgage money readily available for people with solid credit profiles, consolidating a high-cost equity line and an existing first mortgage into a single, new loan is a no-brainer.

Still other applicants, according to Freddie Mac deputy chief economist Amy Crews Cutts, are simply pulling equity from their properties through cash-out refis. Roughly 90 percent of all refinancings of Freddie Mac-owned or securitized mortgages in the company's most recent quarterly survey were for cash-outs.

Cutts estimated that about $500 billion worth of interest-only and payment-option mortgages face their first resets this year, and another $600-plus billion will reset during 2007.

Since the monthly payments after a reset on one of these loans is often 100 percent or more compared with the original low rate, that alone should keep refinancings humming for the time being -- at least as long as 30-year fixed rates remain low. Fifteen-year fixed rates also continue to show declines, according to the MBAA. Last week's average 15-year loan carried a fixed rate of 5.85 percent.

"A lot of people may see (these rates) as the last train leaving the station," said Freddie Mac's Cutts. No matter how they see it, though, there is no question about refinancers' loan preferences: Three quarters of all new loan applicants last week opted for fixed-rate loan products. And no wonder: 30-year fixed rate money not only is hovering just above multi-decade lows, but the spread between one year Treasury-indexed adjustables and fixed rate money is exceedingly narrow.

One year ARMs last week went for an average 5.87 percent, according to the MBAA. A minuscule 28 basis point differential between an ARM -- that could increase to a higher rate in the future -- and a mortgage with a rate fixed in concrete for the next three decades is simply not enticing. Which is why borrowers -- whether for refis or new home purchases -- are staying away in droves.

Published: November 20, 2006

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.