Prepayment activity reaches 22-year low on spiking interest rates

Despite rising inflation, potential for looming recession, the mortgage market is in a strong position with mortgage delinquency hovering near all-time lows

Drop in refis, soaring interest rates and rise in homeowner costs to utilize equity drove prepayment to the lowest level since November 2000.

Prepayment activity dropped 14.9% to a single-month mortality (SMM) rate of 0.57% in September – below the recent record of 0.59% set in January 2019, according to a report by Black Knight

“Refinance activity has historically driven the lion’s share of prepayment activity, but spiking interest rates in recent months have driven the population of rate/term refi candidates to a record low,” Andy Walden, vice president of enterprise research at Black Knight, said. “It’s also caused a significant increase in the cost for homeowners to utilize equity. Together with the ‘rate lock’ effect on housing turnover, this is driving down prepayment all across the board.”

Overall rate lock volume in September dropped by almost 60% from 2021 levels, which was driven by a 26% drop in cash-out refi locks from the previous month, now down 78% from the same period in 2021. Rate/term locks were down 93% compared to September 2021. 

Despite rising inflation, the potential for looming recession and a rapidly changing housing market, Black Knight said the mortgage market is in a strong position, as mortgage delinquencies are still hovering near all-time lows.

As of the end of September, the national delinquency rate inched down 0.2%, just 3 basis points off the record low set in May 2021 year, according to Black Knight. New delinquency inflow of 2,000 in September is still more than 20% below what were already strong pre-pandemic levels, Walden said. 

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“This has increased the expected duration of loans originated in the record low rate environment of 2020 and 2021 and prior, which places a premium market value on such mortgages and their servicing rights,” Walden said. “On the other hand, modeling that expected duration and market value for more recent originations is incredibly difficult given as much rate volatility as we’ve seen and with 30-year offerings nearing 7%.”

Serious delinquencies, which remain elevated by 150,000 from the pandemic, continue to improve. The inflow of new loans that are 90 or more days past due run more than 5% below those levels on average over the past six months.

Foreclosure starts fell 9% from August to 18,400, which is 53% below pre-pandemic levels. With starts initiated on 3% of serious delinquencies, the number is still less than half the rate of the years leading up to the pandemic, Black Knight said. 

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