Fed action spurs refi boom

Demand for refinancing will test the operational capacity of some lenders, Brinkmann said. Many have shut down warehouse lending operations that funded loans originated by independent mortgage brokers, so much of the demand will be handled by loan officers working out of branch offices. An "epidemic of fraud" against lenders in recent years means applications are being more carefully scrutinized, he said.

Also, loan servicers who are already juggling loan delinquencies and workouts are now going to be faced "with massive churn in their portfolios" as old loans are paid off, Brinkmann said.

While the mortgage origination records set in 2002, 2003 and 2005 included large amounts of subprime loans and jumbo loans, the MBA forecasts that 2009 originations will be almost entirely loans eligible for purchase or guarantee by Fannie Mae and Freddie Mac, or the FHA loan guarantee program.

The secondary market for mortgage-backed securities (MBS) that once funded most subprime and jumbo lending has yet to return. But the Federal Reserve has committed to purchase up to $1.25 trillion in MBS backed by Fannie, Freddie and Ginnie Mae, which securitizes FHA loans (see story).

The MBA revised its forecast for mortgage refinancings to reflect the drop in interest rates following last week's announcement by the Fed that it was expanding the program by $750 billion, and that it would also buy up to $300 billion in 10-year Treasurys in the next six months.

In addition, the Fed doubled a previous commitment to buy $100 billion in debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks, bringing the total expansion of the Fed's balance sheet to $1.15 trillion.

The unprecedented loosening of monetary policy, along with burgeoning government debt, could spur inflation and devalue the dollar, which ultimately could send long-term rates back up.

Brinkmann said that with billions in Treasurys to be issued this year to finance record budget deficits, the effect of the Fed's purchases on rates will largely be determined by whether other investors stay in the market or shy away from Treasurys because of fears of future inflation.

If that happens, the effect of the Fed's MBS and Treasury purchases on long-term interest rates will be more short-lived, and MBA's revised refinance forecast could prove too optimistic, Brinkmann said.

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