Recent refinancing activity shows that the new mortgage rate is about 80 percent of the old rate. That is, for example, someone tapping into a  4.0 percent mortgage rate from a previous rate of 5.0.   Though the paperwork demands for refinancing have become excessively cumbersome, the money saved is worth it and people are putting up with all of the questions on their finances in order to save.

Unfortunately, not everyone who could benefit meaningfully has been able to refinance. Mainly this means those homeowners who happen to live in markets where prices came down hard and thereby put their mortgage amount above the appraisal value of their home. Some relaxation on rules, including lower fees, for refinancing is being discussed by policymakers. NAR has been pushing for the passage of the Boxer-Isakson bill, which would permit easier refinancing for those underwater homeowners who have been current on their payments. The basic idea is simple in that if someone could pay a $1,000 mortgage then surely the same person can pay $850. These would greatly reduce incentives for homeowners to default and furthermore is fair, given the very wide interest rate spread currently existing between bank deposits and bank loans.

Another interesting trend in refinancing recently is that more homeowners are bringing extra savings in cash  to the table to reduce the overall loan amount. This ‘cash-in’ refinance (as opposed to the ‘cash-out’ refi) assures financially healthier homeowners in the future.

Back in the housing bubble years, facilitated by very easy credit conditions, crazy things were occurring. Homeowners were refinancing into higher mortgage rates. They were willing to be punished with higher rates in exchange for a ‘cash-out’ refinance. The history of financial market cycles nearly always points to excessive tendencies to the extreme, moving  from overly lax credit to overly restrictive credit. Regulators could potentially design rules to nudge behavior to avoid the extremes (such as enacting extra fees during boom years and lowering fees during downturns).

But such a rule makes too much common sense. Instead we have regulatory conditions where lending is tightest during a downturn.

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