More record low interest rates juiced demand for home loans last week as demand from homeowners looking to refinance surged to the highest level in more than three years, according to an industry group.
The Mortgage Bankers Association's index of mortgage application activity, which includes both refinancing and new home loans, jumped almost 17 percent in the week ending September 28, according to a report released Wednesday.
Refinancing activity, which saw an almost 20 percent increase, hit its highest level since April 2009, dwarfing the growth in applications for new home loans, which inched up by just under 4 percent.
The uptick in demand comes as interest rates hit new record lows last week in the wake of the Federal Reserve's latest announcement that it will buy billions of dollars in mortgage-backed securities until the labor market improves.
"Financial markets continue to adjust to QE3, as the ongoing presence of the Federal Reserve as a significant buyer of mortgage-backed securities applies downward pressure on rates," Mike Fratantoni, MBA's vice president of research and economics, said in a release.
While low rates are spurring lots of refinancing activity—the share of refinancing increased to 83 percent of total applications last week—some experts worry that the deluge of refi applications could be edging out resources needed to process new home loans, a situation that could ultimately cause the green shoots seen in home sales to wilt.
"It does gum up the works," says Bill Hampel, chief economist and senior vice president of research and policy at the Credit Union National Association. "Part of the public policy is to allow more people to refinance, giving them more disposable income. One of the costs of that is that it makes it more difficult for new purchase applications to go through quickly."
"There's a certain amount of capacity and the busier those people are, the more difficult it is for them to handle purchase applications quickly," he adds.
Even though the market has seen a spike over the past week as homeowners pounce on the opportunity to take advantage of lower rates, experts don't anticipate a hiring frenzy in the mortgage lending industry to respond to heightened demand, primarily because volume has been unsteady at best.
"We'll go through a very quiet period and then things will go gangbusters," says Keith Gumbinger, vice president of mortgage information website HSH.com.
There's also the specter of the fiscal cliff and an uncertain tax and political environment, he says, which will likely keep all employers cautious when it comes to taking on more staff.
And while stingy lenders and superstrict underwriting standards are often the go-to fall guys when it comes to laying blame for what ails the housing market, the mortgage industry isn't the only thing stemming more home sales. There are clogs hindering broader improvement in the housing market in nearly every corner of the industry—from the simple availability of homes for sale to appraisal value issues.
Despite the many hurdles that the housing market—and those seeking mortgage financing—face, one factor that could help would-be home buyers is the growing practice of moving up new purchase applications to the front of the line, essentially prioritizing them ahead of the full pipeline of refinance applications.
"Lenders don't mind letting refi applicants wait longer as a result of heavy volume," Hampel says. "Everything might take a little longer for sales to be consummated, but it doesn't necessarily stop those sales. It's just a little sand in the wheels."
According to Gumbinger, although refis are where the comparatively "easy money" is made, new purchase applications open up a vast array of other business opportunities for lender establishments including lines of credit, investments, and insurance.
With a new mortgage application, a lender "gets a picture of a consumer like no other," Gumbinger says. "Their finances are exposed and you can run your models and see what bucket a person falls into and then promote [various services] to them."
"Establishing these new relationships is still crucial to the business," he adds.
Meg Handley is a reporter for U.S. News & World Report. You can reach her at email@example.com and follow her on Twitter at @mmhandley.