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FHA Refinance More Than Doubled in First Half of 2015

FHA-to-FHA refinances surpass FHA-to-conventional for the first time since October 2013

Kristine Yao    |    Mortgage Performance

FHA refinance originations in the first half of 2015 have more than doubled year-over-year. The dollar volume of loans rose sharply from $19.0 billion in the first half of 2014 to $51.8 billion in the first half of 2015, more than a 150 percent increase. In contrast, FHA purchase originations increased by less than 50 percent over the same period, from $51.6 billion to $75.1 billion.

Why the big spike in FHA-insured refinance loans? The agency implemented a 50-basis-point cut in its annual mortgage insurance premium (MIP) in January 2015.1 The reduced annual premium combined with lower mortgage rates has made an FHA refinance more attractive for many existing FHA borrowers and also for some conventional borrowers. In February 2015, after the MIP cut, the median loan age of FHA payoffs refinancing into another FHA loan dropped to 16 months (Figure 1). The median borrower took out a loan in October 2013 when the average FHA 30-year fixed rate was at 4.41 percent, the highest point since 2012. Mortgage rates were about one-half percentage point lower at the beginning of 2015; adding on the 0.5-percent cut in the MIP, the median borrower could benefit from an effective 1-percentage point reduction in mortgage financing costs. While rates remained low in 2015, borrowers who took out FHA loans from October 2013 through 2014 were good candidates for FHA refis.

From the second half of 2012 through January 2015, the share of FHA borrowers who refinanced into another FHA loan – an FHA-to-FHA refinance -- steadily declined from 76 percent down to 29 percent, while FHA-to-conventional refinances reached a peak of 67 percent market share (Figure 2). From November 2013 through January 2015, more than one-half of FHA borrowers who refinanced chose conventional loans. Immediately following the 50-basis-point premium cut, the share of FHA-to-FHA refinances spiked up to 49 percent in February 2015, reached 59 percent by April 2015, and was at 54 percent in June 2015. Monthly FHA-to-FHA transition counts have more than tripled from about 7,000 loans in January 2015 to 25,000 loans in June 2015.

On the opposite end, the transition rate of prior loan products into FHA refinance originations is shown in Figure 3. The share of FHA-to-FHA transitions jumped from 46 percent in January 2015 to 72 percent in March 2015 and was at 63 percent in June 2015. FHA-to-FHA refinances more than tripled in one month from 9,000 loans in January 2015 to 32,000 loans in February 2015. Conventional-to-FHA refinances were 5,100 loans in January 2015 and grew by more than 60 percent to 8,600 loans in March. There were 7,700 conventional-to-FHA loans in June 2015, still up 50 percent from January 2015.

[1] The annual MIP was reduced from 1.35 percent to 0.85 percent. For additional information, see http://www.corelogic.com/blog/authors/stuart-quinn/2015/01/fha-premium-pricing.aspx.

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