Locked-in rate volume has fallen more than 60% in the past 12 months as it struggles under the weight of elevated mortgage rates, which closed October at 7.06%. Amid soaring rates, the refinance market is nearing bottom.
The decline in rate lock volume was driven by a 25.1% drop in withdrawal locks from September and a further 15.7% drop in the refi rate/term, according to Black Knightorigination market report.
“With interest rates now at 20-year highs, the refi market is rapidly approaching a bottom,” said Scott Happ, president of Optimal Blue, a division of Black Knight.
Exploitable equity was near all-time highs earlier in the year, leading to cash withdrawals showing some early resilience, even as rates started to rise. However, withdrawal refis are now down 83.6% from October 2021, and rate/term refis are down 92.6% year-over-year.
Overall rate lock volume also fell 14% from September, with origination activity down 30% in the last three months. Volume is down 61% from the same period last year, according to the report.
The number of borrowers with a refinance incentive also hit an all-time low of around 130,000, and “the vast majority of them are at least 14 years old in a 30-year mortgage, with few incentive to restart the clock,” Happ said. .
Prioritizing home equity solutions in a rising rate environment
The housing market in 2022 has been highlighted by spikes in interest rates and falling refi, and lenders are working hard to adjust to new borrower trends. HousingWire recently spoke with ServiceLink’s Barry Coffin about ways lenders can capitalize on these trends by improving their home equity solutions.
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At 86%, purchase mortgages continue to account for the largest share of rate lock-ins since Optimal Blue began tracking data in 2018. However, purchase loans have come under continued pressure to declining due to affordability constraints. In dollar volume, lock purchases fell 13% from September and 39% from October 2021.
“Affordability remains the overriding concern in the mortgage origination market right now,” Happ said. “Although home prices continue to decline in a growing number of markets across the country, the current pricing environment means affordability remains a thorny challenge.”
It’s no surprise to see a resurgence in “slightly lower rate loan products like adjustable rate mortgages (ARMs)”, which accounted for 13.1% of October lockdown activity. That was up from 11.3% in September, according to Happ.
With new underwriting guidelines in place, ARMs are also making a comeback as homebuyers seek lower monthly payments. ARMs became virtually nonexistent after the 2008 housing crisis due to predatory lending practices, with many subprime lenders offering interest-only ARMs to borrowers, including those who could not qualify for conventional mortgages.
“Affordability, rates and home values are all factors in lower purchase prices and loan sizes and all generate headwinds beyond the normal seasonal downturn,” Happ continued.
And, after a brief rise in September, the average purchase price and average loan amount fell in October to $423,000 and $337,000, respectively.
Credit ratings also fell across the board, with the average ratings of borrowers who made withdrawals dropping a further 3 points. The average credit score on cash refinances is now 690, down 37 basis points from the same time last year. The credit score on buy mortgages fell 1 basis point to 729, and the refi rate/term fell 2 basis points to 736 in October.
