Rate lock volume has dropped by more than 60% over the past 12 months as it struggles under the weight of high mortgage rates, which closed out October at 7.06%. Amid the surging rates, the refinance market is nearing the bottom.
The decline in rate lock volume was driven by a 25.1% decline in cash-out locks from September and an additional 15.7% drop in rate/term refi, according to Black Knight’s origination market report.
“With interest rates now at their highest level in 20 years, the refi market is rapidly approaching a bottom,” Scott Happ, president of Optimal Blue, a division of Black Knight, said.
Tappable equity was near all-time highs earlier in the year, which led to cash-outs showing some early resilience, even as rates began to rise. However, cash-out refis are now down 83.6% compared to October 2021, and rate/term refis have dropped by a staggering 92.6% year over year.
Overall rate lock volume has also dropped 14% compared to September, with origination activity down 30% in the last three months. Volume is down 61% compared to this time last year, according to the report.
The number of borrowers with rate incentive to refinance also hit an all-time low of about 130,000, and “the vast majority of those are at least 14 years into a 30-year mortgage, with little incentive to restart the clock,” Happ said.
The 2022 housing market has been underscored by interest rate spikes and refi decline and lenders are working hard to adjust to new borrower trends. HousingWire recently spoke with ServiceLink’s Barry Coffin about the ways lenders can capitalize on these trends by revving up their home equity solutions.
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At 86%, purchase mortgages continue to make up the largest share of rate locks since Optimal Blue began tracking the data in 2018. However, purchase lending has faced continued downward pressure due to affordability constraints. By dollar volume, purchase locks dropped 13% compared to September and 39% compared to October 2021.
“Affordability remains the overarching concern in the mortgage origination market right now,” Happ said. “Despite home prices continuing to pull back in a growing number of markets across the country, the current rate environment means affordability remains a thorny challenge.”
It’s not surprising to see a resurgence of “somewhat lower-rate loan products like adjustable-rate mortgages (ARMs),” which made up 13.1% of October’s lock activity. That was up from 11.3% in September, according to Happ.
With new underwriting guidelines in place, ARMs are also making a comeback as homebuyers seek lower monthly payments. ARMs became virtually non-existent following the 2008 housing crisis due to predatory lending practices, with many subprime lenders providing borrowers with interest-only ARMs, including those who couldn’t qualify for conventional mortgages.
“Affordability, rates and home values all factor into falling purchase prices and loan sizes and all are generating headwinds over and above the normal seasonal downturn,” Happ continued.
And, after a brief uptick In September, both the average purchase price and average loan amount fell in October to $423,000 and $337,000, respectively.
Credit scores also fell across the board, with cash-out borrower average scores falling another 3 points. The average credit score on cash-out refinances is now at 690, 37 basis points lower than the same time last year. Credit score on purchase mortgages declined one basis point to 729, and rate/term refi dropped 2 bps to 736 in October.