Are record-low interest rates masking high-cost mortgage lending?

Are record-low interest rates masking high-cost mortgage lending?

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Prepayments drop sharply as apparent refi-burnout hits the market

underwater homeowner

Refinancing activity may have reached its breaking point, with prepayment rates – a barometer of refi activity – plummeting 30% between May and current levels, new data from Lender Processing Services says.

Mitch Cohen with LPS pointed out Monday that “rising mortgage interest rates are having a definite impact on the refinance landscape.”

And he’s not alone in his estimations.

Sarah Hu with Royal Bank of Scotland (RBS) released a similar report on the market, noting that prepayments on agency loans slowed in September as HARP-burnout hit and mortgage rates continued to edge up.

The conditional prepayment rate on Fannie Mae 30-year mortgages fell 25% from 18 CPR to 14 CPR.

"Despite the recent rate rally arising from the Fed's no-tapering decision, we believe that refinance demand will continue to decline and that prepayments will be heavily driven by housing turnover,” Hu wrote.

Cohen with LPS says rates began their 100-basis point climb to current levels back in May.

Another issue that is slowing refi activity is the fact that 50% of borrowers are now what LPS calls ‘out of the money’ for refinancing, which means their current lows already have rates below today’s 30-year average rate.

"This puts the ‘refinancible’ population now at just about 5.7 million as compared to roughly 10 million back in December," LPS said.

But there’s an upside to higher rates as more borrowers gain home equity, Cohen suggested. As equity gains are made, borrowers may begin looking for home equity loans, giving a boost to another side of the lending market. Home prices are now at their highest levels since 2009, which is making borrowers more equity rich than they have been in years.

When the Fed recently announced that it would not begin tapering MBS and Treasury purchases, rates rallied, HU with RBS said in her latest report.

But she’s not expecting the optimism to necessarily be long-lived, especially if the government stays closed for a while.

"If the current government shutdown is short-lived, we would expect to see a minimal impact on speeds," Hu wrote. "However, if it is prolonged, there will likely be greater repercussions. The nation's large lenders have indicated that mortgage transactions, including refinances, may be delayed until the shutdown ends."

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