Borrower applications to refinance Federal Housing Administration mortgages nearly tripled in June in order to take advantage of grandfathered insurance premiums.
Banks received 102,640 refinance applications on FHA mortgages in June, up from just more than 34,000 in May, according to an agency report released this week.
On June 11, the FHA allowed borrowers with loans endorsed before June 1, 2009, to take advantage of a streamlined program and pay reduced rates for upfront and annual insurance premiums. Income, employment and credit scores are not verified, and an appraisal is not needed. Principal and interest can be cut under the program, or the borrower can refi into a shorter-term loan to recover equity quicker.
Bank of America Merrill Lynch (BAC) analysts expected prepayment speeds on the Ginnie Mae bonds these mortgages back to pick up in June, but the activity surprised even them.
"While the grandfathered MIPs went into effect on June 11, 2012, speed increases in the June report provide evidence of pent up demand and high pull-through rates," analysts said. "We also believe there was added impact of third party originators on refinancings resulting in borrowers being targeted in the lead up to the June 11 effective date."
During June, FHA loans originated before eligibility cut off for the program, analysts showed, pre-payed out of the Ginnie bonds at twice the rate as they did in May.
The idea of the program, which was announced earlier in the year, was to reduce future risk on the FHA portfolio. Serious delinquencies rose for the second month in a row in June to more than 721,000 mortgages. The delinquency rate is at 9.5%, the highest level since the start of the year.
Finances could recover as a result of recent insurance premium raises and possible defaults and claims avoided, according to a recent story in Bloomberg.
Capacity will be tested at the largest servicers for the streamlined refinanced program. Wells Fargo (WFC) and other large banks limited their participation in the program only to loans they hold in their own portfolios. The program will begin to dissipate by autumn, about the same time as when demand for the Home Affordable Refinance Program for Fannie Mae and Freddie Mac loans is expected to slow, according to the BofAML analysts.
"We expect (Ginnie) speeds will continue to increase for the remainder of the summer, peaking in August before slowing down by September," analysts said.
The FHA projects to receive 630,000 refinance applications for its fiscal year 2012, which would be a 23% increase from the previous 12 months.