New York: American homeowners are rushing to refinance mortgages at near-historic low rates, with loan applications staying close to three-year highs.

Traders and loan originators are awaiting more signals from the Federal Reserve - the biggest buyer of wholesale mortgages - which could prompt a big increase in the amount of mortgages available at ultra-low rates.

A slight decline in applications last week reflected a modest rebound in mortgage rates and a debate in financial markets about how much further rates could fall. After the Fed announced on September 13 that it would buy an unlimited amount of mortgage-backed securities at a rate of about $70 billion a month until unemployment came down, mortgage refinance applications surged to their highest levels since 2009, according to the Mortgage Bankers Association.

The number of refinancing applications declined 2 per cent last week, after a 20 per cent jump in the previous seven days. The number of mortgage applications overall, including for new home purchases, was down 1.2 per cent.

“Volume is still near three-year highs, and purchase applications increased to the highest level since June,” said Mike Fratantoni, MBA’s vice-president of research and economics.

The level of refinancings is critical to the effectiveness of the Fed’s bond-buying programme, since they could put additional money in homeowners’ pockets and help boost demand in the economy. By bringing down mortgage rates, the Fed is also hoping to stoke a housing market recovery.

However, the initial downward pressure on mortgage rates appears to have eased somewhat. The average rate on a 30-year mortgage guaranteed by the government agency Freddie Mac fell to a record low of 3.36 per cent last week, from 3.55 per cent before the Fed’s quantitative easing programme was announced. The latest weekly figure is published by the agency on Thursday.

HSH, a private organisation that also tracks mortgage rates on a daily basis, has seen a rebound in rates. It is currently showing an average 30-year fixed-rate mortgage at 3.53 per cent, up from a trough of 3.39 per cent. MBS traders believe that a step-change lower in rates could only come if the Fed moves to make substantial purchases of ultra-low rate loans in the wholesale market.

New MBS are presold in buckets divided according to the coupon, or rate, and the Fed’s buying activity has so far been concentrated in these so-called “pass-throughs” with a coupon of 3 per cent or above. However, a recent surge in activity in purchases of 2.5 per cent pass-throughs suggests the Fed has begun buying at these new low levels.

Last Tuesday, $617 million of 2.5 per cent pass-throughs traded, according to Finra data, more than twice the ten-day average. The trades help set a price, and prove demand for mortgages with ultra-low rates.

The volume in 2.5 per cent pass-throughs is still a fraction of trading in the 3 per cent coupon, which was $91.5 billion on Tuesday.

— Financial Times