NEW YORK — When 30-year conforming mortgage interest rates fell into the low 6% range in August/September of this year, the mortgage industry experienced a welcome burst of refinance activity, according to Intercontinental Exchange’s ICE Mortgage Trends data.
As Andy Walden, ICE vice president of Research and Analysis explains, homeowners with loans originated in the last few years were quick to act when the rate calculus turned in their favor.
“Homeowners pounced on their incentive to refinance as rates fell through August and September,” said Walden. “More than 300K mortgage holders closed on refinance transactions in September and October, the most we’ve seen in two-and-a-half years. What’s more, almost half of that activity involved the homeowner refinancing into a better rate, with October marking the first time in three years that there were more rate/term than cash-out refinances in a given month.”
ICE Market Trends data also showed that technologically adept lenders were ready to meet that demand, with average closing times among all loan types – purchase as well as cash-out and rate/term refinances – all hitting their lowest October levels in the five years ICE has been tracking the metric. According to ICE McDash +NextLoan data, which tracks loans before and after a refinance or other prepayment, this is translating into higher retention rates as well, with servicers retaining more than a third of customers refinancing to improve their rate or term, the best in two and a half years. As has been the case in recent years, retention was strongest – nearing 40% – among those who’d recently taken out their mortgages.
“This brief, but welcome, spike in refinancing was dominated by homeowners quickly ditching their recently acquired mortgages,” Walden continued. “Refinances out of 2023 and 2024 vintages drove an impressive 78% of recent rate/term lending and nearly half of refi activity overall. The average rate/term refinancer had been in their prior mortgage for just 15 months, the shortest average length of time in the nearly 20 years we’ve been tracking that metric. For most, this was a no brainer; on average, these folks cut their first lien rates by more than a point and their monthly mortgage payment by $320 per month. That works out to roughly $47M in monthly payment savings locked in by homeowners in just September and October alone.”
More than two thirds of all rate/term refinances dropped their rate by more than a full percentage point (pp), while nearly a third were able to improve their rate by 1.5 pp or more. Borrowers with mortgages backed by the VA saw the largest monthly improvements, dropping their rates by 1.28 pp on average in October, as compared to the 1.08 to 1.18 pp declines seen among other loan products and investor classes
“As you’d expect,” Walden continued, “the interest rate threshold at which a given homeowner would be enticed to pull the trigger on a refi varied by loan size. Nearly half of refinancing borrowers with balances between $250K and $375K needed a 125 basis point (bps) reduction before deciding to refi. The distribution of rate savings for those with balances between $375K and $624K were largely similar. Once a borrower’s balance got above $750K, however, it was clear that less rate incentive was required for a refinance to be of value. Nearly 40% of those borrowers cut their first lien 75 bps or less by refinancing, and about 12% saw benefit in doing so even with less than a 50 bps reduction.”
Refinances from and back into VA mortgages accounted for approximately 30% of September and October rate/term lending, some four times their representation among active mortgages. In addition to the increased prepayment risk this represents, performance risk must be taken into consideration as well. More than 35% of 2024 VA rate/term refinances have had loan-to-value ratios over 100%. This stems from a combination of the refinancing of more recent vintages, which haven’t had time to improve their equity positions, and loan programs that allow borrowers to finance closing costs and even interest rate buydowns up to certain thresholds.
Source: Intercontinental Exchange
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