Another Round of Refinancing Predicted

Defying predictions that the refinance market had reached its peak and would begin to ebb, the continuing decline in mortgage interest rates--which last week averaged about 6.3%--is now expected to spark another round of refinancings and home buying, analysts say.

The wave of expected new refinancings stems in part from the Federal Reserve’s acknowledgment Tuesday that the economy is continuing to soften and from the expectation that the Fed will lower its key short-term rate in September.

“We just revised our forecast for this year to $2 trillion in total loans, with at least a trillion dollars in refinancings,” said Doug Duncan, chief economist for the Mortgage Bankers Assn. of America. “These numbers could match our 2001 record, the biggest in history.”

Mortgage interest rates typically don’t move in tandem with the Fed’s key short-term rate, which is the interest banks charge each other on overnight loans. Rather, mortgage rates tend to follow long-term bond yields--specifically, the 10-year Treasury note yield, which last week dropped briefly to 3.96%, for the first time since 1963.

As stocks have tumbled this summer, some investors have taken money from stocks and invested in bonds instead, helping to drive yields lower. That has created an environment in which borrowers who already refinanced this year are eager to do it again, said Doug Perry, first vice president of Countrywide Home Loans.

Consumers want to refinance to remodel homes, buy a car, pay college expenses or pay down credit card debt.

“What’s most important is that this refinancing activity is producing a lot of money to be spent by consumers,” said Bob Gahagan, a manager at American Century Investment Management.

And that, analysts say, helps the economy in the short and long term.