Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Sep 27, 2012

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Mortgage refinance loan applications have outpaced new home loan applications despite increased home construction and efforts by the Federal Reserve to promote home buying. While this may be great for mortgage refinance loan lenders, it may not be great for those looking to boost the housing industry with new mortgage originations. The reason for the mortgage refinance loan application increase may show that borrowers are still “gun shy” about taking out new home loans.

Consider the fact that new mortgage applications fell in spite of the recent home loan interest rate decline. In contrast to this, mortgage refinance loan originations increased 1 percent last week to 81 percent of all mortgage applications—a new all time high. In comparison, from 2005 to 2007, mortgage refinance loans made up less than 44 percent of all mortgage applications.

Clearly, current home owners are refinancing in order to take advantage of record low mortgage rates by locking them in now.

Mortgage rates have declined since the Federal Reserve decided to purchase $40 billion worth of mortgage-backed securities each month in an attempt to encourage wider investment. According to the Mortgage Bankers Association, 30-year fixed-rate mortgages fell from 3.75 percent to a record-low of 3.72 percent in the second week of September.

However the drop in new mortgage applications raises the question of why so few prospective borrowers are looking for housing in the market.

Lenders have tightened requirements, which is why applicants aren’t seeking or being able to obtain new mortgage loans. The high requirements to qualify prevent many applicants with poor credit scores from obtaining mortgage loans.

Likewise, there are simply fewer applicants because so few people—qualified or not—wish to add more debt to their lives as the recession lingers on. Given how difficult the recession has been, many people have been forced to go into debt in order to survive. Purchasing a home is likely not on the top of the list for debt-laden consumers.

On the local level, some regions do not have a large supply of desirable homes available for sale. This affects the number of homes that willing and able homebuyers can view.

Worsening the situation is the fact that some banks have begun to demolish homes in an effort to raise property values now that banks hold a large number of foreclosed homes. Regardless of declines in real estate prices and lower interest rates, sales for new homes are unlikely to increase anytime soon without economic recovery.

This year, lenders have taken advantage of lower interest rates by raising the amount they earn from the spread between what it costs to borrow money and what is charged to customers. Lenders, such as banks, earn money from new mortgages and mortgage refinance loans by lending them to borrowers at a set or variable rate. Later, these are bundled and sold again as mortgage-backed bonds that pay interest to their new owners.

Since 2007 the difference between the rate at which loans were sold to borrowers and the rate at which they pay interest after bundling has been roughly 0.75 percent. Within the last year, however, that rate nearly doubled, now sitting at more than 1.4 percent. Clearly, lenders are making a killing amid the resale spread to bundle purchasers.

Uncertainty—or, more bluntly, fear—has brought America to this point. Americans are afraid to go into debt to purchase a home, low rates or not, because of fear of unemployment. Without a job, monthly mortgage payments—however low—could not be met reliably. Additionally, banks, themselves fearful, are unwilling to offer financing to all but the most reliable of applicants. It seems only a stronger and robust economy can amend this situation. An increase in employment combined with increased consumer spending can lead to more borrowers seeking to purchase a home. Until that time, lenders will have to suffice with existing homeowners who wish to borrow mortgage refinance loans.