The Yogi Berra refi market
Last week I pointed to JP Morgan and Wells Fargo’s earnings as the latest evidence of refinancing boom in the US housing market. Cue a lengthy piece by Chris Taylor that seems to dent my thesis by highlighting the “hell” of actually refinancing a mortgage.
Anecdotally, Taylor’s piece is worrying, if not entirely shocking. Banks are capable of incredible feats of bureaucratic annoyance and the refinancing process is no different (see the comment here that echoes Taylor).
But these annoyances aren’t stopping the refi boom on a macro level. At the beginning of the month refinancing applications reached their highest levels since 2009 and and bank earnings show these applications are being converted into loans. Applications have dropped off slightly over the past few weeks, but there hasn’t been a real change in the dynamics that have driven refinancings for the last three quarters. And with an unlimited amount of QE3 fuel to burn, high levels of refis will continue.
Paired with the larger, data-backed trend, the horror stories Taylor compiles amount to a housing market version of Yogi Berra’s comment about a formerly popular restaurant: “Nobody goes there anymore, it’s too crowded”. It’s true refinancing is a pain – it’s also true that a lot of people are doing it.
Scott Laperruque, whom Taylor describes trying to navigate a nightmarishly opaque process, is still trying, despite the hassle, to get his refi. The economic incentives far outweigh the annoyance. And perversely, as more homeowners refinance, more grist is provided for complaints that refinancing is difficult. They sound bad, but articles like Taylor’s are oddly bullish for refinancings — as long as people are complaining, at least you know they’re trying. And, of course, the more popular refinancing becomes, the more complaints about the process there will be.
There are good economic reasons why there should be some amount of red tape between a homeowner and a refinancing. It may be an over-correction, but a shift away from the liar loan days of 2006 is a good thing for health of lenders. From a behavioral perspective, the hassle also forces homeowners to realistically evaluate their savings from a refi and only go through with it if it really saves them money. The more distance between late night TV spots and pop-up ads that shout at homeowners to “refinance now!” and an actual refinancing, the better. Call it an economic benefits of red tape: it can hold banks and homeowners back from acting on their worst judgment.