The December rush to refinance mortgages was set off by the fall in 30-year fixed mortgage rates to nearly 5.0% from 6.5% last summer. Similarly the year ago refinancing surge was the result of rates dropping briefly below 6.0% for the first time in more than two years.

Mortgage applications to purchase homes increased modestly in December, remain depressed and continue to trend down from earlier in the year. This is hard evidence that it is the actual and feared loss of income and not high mortgage rates that is depressing home sales.

While it will be hard to measure any positive impact on the housing market from the refinancing surge there will be a positive impact on the economy.  Some mortgage brokers have stopped layoffs and resumed hiring to handle the flood of applications which will likely continue into the first quarter of 2009.  Homeowners that secure a lowered mortgage rate will typically reduce their monthly payments by more than $100 which will add to disposable consumer income. This will enable a small share of refinancing homeowners to stay in their homes rather than put up a for sale sign.

The abrupt fall in mortgage rates is part of the natural process to end the recession and resume economic growth.  But alone, the lower mortgage rates are not enough to halt the slide in spending.  They only add to the cushioning that limits the depth and duration of the recession.

Homeowners with substantial equity and good credit are taking advantage of a rare opportunity to lower their mortgage rate for many years. The flood of refinancing applications suggests that consumers see current mortgage rates as about as low as they will get in this cycle.

Lenders see a 5.0% mortgage loan to a good credit risk with a relatively low loan to value ratio as an attractive lending opportunity. This is rational at a time when loan demand is depressed and lenders are shunning high risk/ high return deals. Their alternative is to park surplus funds in near 0.0% short term Treasury Bills or take a piece of a syndicated corporate loan or commercial mortgage when the borrowers balance sheet is likely to deteriorate further in 2009.

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