Wave of refinances lifts economy, for now

In Neil Cribb's business, evidence of a recession normally presages months of slow business and listless employees looking for pencils to sharpen.

But since September, when the economy first showed signs of a severe downturn, Mr. Cribb's mortgage business in Safety Harbor, Fla., has been flooded with eager clients and piles of paperwork.

"There's been tremendous demand... It's taken an average of 15 more days than usual for us to process all our customers," says Cribb.

Lenders across the nation report a similar scene. A record number of homeowners are refinancing their mortgages, attempting to take advantage of rates that are nearing their lowest levels in 30 years.

But more than just the attractive rates are driving the latest wave, lenders say. Thanks to a rare confluence of economic events - namely, what appears to be the start of a recession without high inflation - now may be the perfect time to refinance.

Mortgage rates have been relatively low all year. Since Sept. 11, investors have fled the stock market for less risky investments, such as Uncle Sam's Treasuries. As a result, Treasury yields have dropped, carrying mortgage rates with them.

The lending largess is more than just good news for individual families. The extra cash in the pockets of Americans is helping prop up an otherwise flagging economy. Sometimes householders take out some home equity for special projects.

But even if the Federal Reserve continues to cut interest rates at its meeting next week, the best mortgage deals may be fleeting. Congressional plans to pass a stimulus package to fight a recession are threatening to put the federal budget in deficit. This, observers say, threatens to send rates up, and could put an abrupt end to one of the nation's broadest refinance booms in decades.

"We're encouraging people to lock in now," says Cribbs. "The risk is far greater that loans will become out of reach."

In the upper Midwest, colder temperatures normally chill homeowners' zeal to reshuffle their finances, according to Bob Binger, assistant vice president of Johnson Bank in Madison, Wisc. But today, despite gray skies and windshield frost, Madisonians are taking advantage of the refinance window.

"It's a frenzy," says Mr. Binger, who says the US is in the midst of its fourth refinance boom in his 16-year career.

Illinois homeowner Steve Dylo had been watching interest rates for six months, waiting for the right moment to refinance.

After missing out on an opportunity earlier in the year, last week he decided to pounce when rates hit 6.60.

"I wasn't going to wait three days like last time and lose out," says Mr. Dylo, a commercial printer in Bartlett, who's planning on refurbishing his basement with the savings.

He may have moved just in time. Economists are already seeing signs of a rate retrenchment on the horizon.

The Federal Reserve is printing more money to revive the economy. One effect of this will be to pay for government spending on everything from homefront security and the military effort in Afghanistan to billions in aid to the airline industry.

The expansion of the money supply, some analysts say, will likely make an uptick in inflation inevitable.

Indeed, many mortgage lenders are holding long-term rates higher than they might otherwise, in anticipation of budding inflation next year.

Some experts are comparing likely lending prospects a year from now with the late 1970s, when inflation shot up in response to a decade of government spending on the Vietnam War and social programs at home.

Moreover, a number of lenders tend to tighten their lending policies during recessions, regardless of the government's response.

Concern regarding spreading unemployment makes lenders reluctant to offer lower fees, particularly to first-time home buyers.

"Why would a bank want to make it easier not to get their money back in a recession?" asks Ken Thomas, a lecturer on finance at the Wharton School of Business at the University of Pennsylvania in Philadelphia. "The last thing they want to do is foreclose on a property. It causes them a lot of headaches."

On paper, long-term, fixed mortgage rates have room to inch lower. Because mortgages are held for an average of eight years, most mortgage lenders use Treasury bonds, another long-term security, as a bellwether for the economy. And mortgage rates normally hew closely to it.

But present rates on a 30-year fixed mortgage are well above the interest on 10-year Treasury notes.

And the free market will keep the floor on mortgage rates from falling much further.

If the Fed cuts interest rates again next week, and perhaps even the following month, those who buy mortgage-backed securities will have little incentive to invest in a product that yields so little return.

"Very few people want to make 5 percent on a loan for 30 years," says Darush Mabadi, president of Clybourn Financial Services in Evanston, Ill. "You could buy federal bonds, corporate bonds.... There's a point where mortgage rates start getting to be less and less logical to lend at."

Nonetheless, rates won't be heading into the double digits in the immediate future. Lenders predict rates on 30-year, fixed mortgages will remain below 7 percent for the next few months.