U.S. Economic Outlook, January 2019: Refinance Share in 2019

Rate-and-term’ refinance supplanted by rise in ‘cash-out

By Frank Nothaft Housing Affordability, Real Estate

Mortgage rates are expected to rise further this year to their highest level in a decade, affecting home buyer’s monthly payments and lessening the dollar increase in home-purchase lending. A larger effect will be on refinance:  Millions of homeowners had refinanced into low-rate mortgages over the last few years.  These homeowners are unlikely to refinance their low-rate mortgage unless needing to cash out some home equity for home improvements or other expenditures. 

Using the CoreLogic TrueStandings data, we calculated the cumulative distribution of single-family mortgage debt outstanding by interest rate on the loan.  Only 3 percent of the debt outstanding had a mortgage rate of 6 percent or higher, or only about $300 billion had a financial incentive to refinance to a lower rate. (Figure 1) Why haven’t these homeowners refinanced already?  Some may have insufficient home equity, a recent delinquency, or a small loan balance:  The average loan size was about $100,000 for these high-rate loans.

To Refinance Falls As Rates Rise

There do remain many homeowners who do have a financial incentive to refinance, albeit for other reasons.  For instance, FHA borrowers with at least 20 percent home equity, good credit, and a mortgage rate near or slightly below today’s market rates can refinance into a conventional mortgage without mortgage insurance, eliminating their insurance premiums.  Between October 2016 and September 2018, about 500,000 FHA borrowers did exactly that.[1] As another example, homeowners who are financing a major home improvement may choose to refinance rather than take a costlier second mortgage.  In the CoreLogic public record data we found that the cash-out share of new refinances exceeded 40 percent during the third quarter of 2018, the highest in 14 years, and we expect an even higher share this year.

Refi Share Projected to Fall to 25-Year Low

Taken together, the consensus view is that the refinance share of originations will decline to about 25 percent of dollar lending this year.  That will be the lowest four-quarter share in 25 years.[2]  (Figure 2) Nonetheless, increases in purchase lending will likely offset the decline in refinance to leave the dollar volume of originations in 2019 at about the same level as last year.

[1] We analyzed CoreLogic public records data to identify the number of FHA-to-conventional refinance originations during the two-year period.

[2] Home Mortgage Disclosure Act data indicate that refinance comprised 23 percent of single-family originations from mid-1994 to mid-1995. The ‘consensus view’ was formed by averaging the origination forecasts of the Mortgage Bankers Association, Fannie Mae and Freddie Mac.

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