Mortgage refinancings spike after Fed cut

By Al Yoon and Julie Haviv - Analysis

NEW YORK (Reuters) - In one of the first signs of life in a battered mortgage market, homeowners are lining up to capitalize on this week's plunge in interest rates, which made an additional $1 trillion in loans attractive for refinancing.

Fears of a U.S. recession and an emergency Federal Reserve interest rate cut pushed rates near record lows this week, dropping benchmark 10-year Treasury note yields to as low as 3.30 percent on Wednesday from 3.70 percent a week ago.

That increased the amount of mortgages eligible for refinancing by around 50 percent to more than $3 trillion, based on estimates using Bear Stearns & Co data.

Homeowners with a $250,000 loan paying 6 percent interest today could save at least $1,200 annually by refinancing to today's fixed rates at 5-3/8 percent, according to rates cited on Wednesday by Web site Refinance.com. Wells Fargo & Co (WFC.N: Quote, Profile, Research, Stock Buzz) offered a rate of 5-1/8 percent, with 1 percent of the loan paid upfront, according to an automated e-mail.

Most of the fixed-rate mortgages outstanding carry interest between 6 percent and 6.5 percent, so prospective savings have created feverish borrower activity.

"There is pandemonium right now at the mortgage banks," said Bob Walters, chief economist at Quicken Loans, an online mortgage lender in Livonia, Michigan. "They are knee-deep in telephone calls" from customers seeking better rates, he said.

The average 30-year fixed mortgage rate at 5.49 percent as of Friday was its lowest since June 2005, the Mortgage Bankers Association said on Wednesday. The rate has plunged 0.69 percentage point since mid-November.

Fed Chairman Ben Bernanke's emergency 0.75 percentage point cut in the U.S. central bank's target interest rate on Tuesday is seen as a move to save an economy on the verge of a recession, and provide a much-needed exit for borrowers with mortgages facing the shock of rate adjustments.