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Do higher mortgage rates mark the end of the refi wave?

Refi activity is still showing positive trends but waning as rate locks get stuck in the pipeline

We may never again see a year like 2020. That’s somewhat somber news for the lenders who benefited from a series of downright strange conditions and record low mortgage rates to generate more refi business than anyone in March could have imagined.

Both Fannie Mae and Freddie Mac reported that refis made up about 70% of their mortgage activity in 2020, driven by weeks upon weeks of record low mortgage rates.

However, despite a rise in overall mortgage applications over the last week, the Mortgage Bankers Association reported that refinance activity waned with rising rates. As of Monday, the average 30-year fixed refinance climbed to 3.07%, well above Freddie Mac’s PMMS low of 2.65% in January.

For many potential borrowers, the opportunity to refinance is lost before the chance even arises, while other prospective borrowers got caught in a clogged loan pipeline and don’t get the opportunity to lock in that low rate.

“There’s a lot of floating loans out there, and those pipelines are going to get hit if rates keep on going up,” said HousingWire lead analyst Logan Mohtashami.

At the current rate, the MBA expects rates to exceed 3% by the second quarter of 2021, and by 2023 forecasts rates higher than 4%. 

A one-eighth to a quarter turn in mortgage rates (high or low) can move the market substantially, Mohtashami noted. Even the 50 bps adverse market fee that some industry experts labeled as “unwarranted” back in December didn’t put an end to the refi wave like fluctuating rates could.

“There are people who had a 4.00% rate that refinanced to 3.25% and then said, ‘Oh well now that rates are low, I’ll refinance again to 2.75%.’ But if that rate sneaks up a quarter it’s no longer ideal and it’s lost its appeal. They are going to wait for it to come back down, right? And then it doesn’t,” Mohtashami said.

Still, mortgage rates are low enough right now to appeal to existing homeowners who could save hundreds a month on a lower rate, noted Joel Kan, the MBA’s associate vice president of economic and industry forecasting.

“The one-week reversal in the recent upswing in rates drove an increase in both conventional and government refinance activity, as borrowers continue to lock in these historically low rates,” Kan said.

According to data from Black Knight, as of Jan. 14 there are 16.7 million borrowers who meet broad-based underwriting criteria and could save at least 0.75% on their mortgage rate through a refi.

Few, if any, economists think that 16.7 million borrowers are actually considering snagging that opportunity. Even years that don’t swell like 2020 bring in millions of potential borrowers, but the demand witnessed in 2020 requires historically low rates.

While a slower refinance market may close the window for some, lenders today are still benefiting from favorable market conditions.

Black Knight’s December mortgage monitor report found refinance-related rate locks over the first 15 days of January were up 10% from the prior month and 90% from the first week of January 2020, representing one of the strongest weeks of rate lock activity since the refinance boom kicked off in early 2020.

Len Kiefer, deputy chief economist at Freddie Mac, agreed that higher rates will likely cool refinance activity. But data from the GSE still predicts a significant volume in the first quarter of 2021.

“Despite the large refinance volume in recent months, our analysis indicates that there are many homeowners who could benefit by refinancing at today’s interest rate,” Kiefer said. “We estimate that borrowers saved over $2,800 a year on average in lower payments by refinancing. That provides a significant boost to the cash flow of American households.”

How a slowed refi wave will affect the market remains a burning question. Several top independent mortgage banks made their public debut thanks to a surging refi market, including Rocket Companies, LoanDepot, Homepoint and United Wholesale Mortgage.

“It’ll be interesting to see how they’re able to meet their shareholders objectives,” said David Stevens, former president and CEO of the MBA.

“Because shareholders aren’t used to the volatility in the mortgage business. Banks can offset the volatility because they have other investments that they do. But mortgage companies are monoline and some of the ones that went public are very high refinance,” Stevens said.

One of the only factors that could move mortgage rates back down at the moment would be a stock market correction, which hasn’t happened since March 2020, Mohtashami said. Investors would retreat for safety in the bond sector, bringing rates down, he said.

Mortgage rates are inextricably linked to the yield on the 10-year Treasury note, which has been rising in recent weeks over concerns that the health of the economy could lead to inflation, which is worrisome for bond investors. 

“It was a beautiful thing to see that 10-year treasury yield go over 1.33%,” Mohtashami said. “We should all be jumping for joy as the bond market shows the American bears that America is back. With the yield in the range of what I like to call the ‘sweet spot,’ we can expect the mortgage rate to move up toward 3.37%. And we’ve gotten so much positive news on the vaccine recently that rising rates means a stable economy, even if it does cool the market.”

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