Interest Rates Fuel Refinance-Driven Market in 2019

Refinance loan originations jumped 59% in 2019

By Arthur Jobe Mortgage Finance

CoreLogic TrueStandings servicing data shows the average interest rate for a home loan slid from 4.96% in December 2018 to 3.75% in December 2019. [1] Effects of falling interest rates include more homeowners refinancing an existing home loan, purchasing a new home or taking out additional debt with a second lien.

In the first quarter of 2019, mortgage rates were at an eight-year high when they began to fall.[2] The continued downward trend led to a quarterly year-over-year drop in first-lien mortgage originations, from 1.43 million loans to 1.28 million.[3] However, by the middle of the second quarter, homeowners were borrowing at 4.24%, marking the lowest rate since February 2018, resulting in an uptick in originations. Mortgage rates continued to decline throughout the remainder of 2019, and refinance volume, which is particularly sensitive to interest rate levels, was impacted most.

CoreLogic public record data shows the total yearly count of refinance, purchase and home equity loans increased by 18% in 2019 to roughly 9.51 million, up from 8.06 million in 2018.[4] Refinance loan volume grew by 59%, while purchase originations remained relatively flat with only 4% growth.

Figure 1: Home Loan Origination Counts

Refinance Insights

According to public records data, first-lien refinance volume grew from roughly 2.36 million loans in 2018 to 3.74 million loans in 2019. CoreLogic TrueStandings data shows the growth in rate-and-term refinances far exceeded cash outs starting in the second quarter of 2019. The cash-out share of refinances peaked during the end of 2018 at 68% but fell to just 39% by the end of 2019. The decline in cash-out share was due to a surge in rate-and-term refinance originations, which was the result of decreasing interest rates. Over time, we see the cash-out refinance share of total refinances generally follows changes in home-loan interest rates [Figure 2].

Figure 2: Rate-and-Term Share of Refinances Increase With Decreasing Rates

Purchase Mortgages

CoreLogic public record data shows a 4% year-over-year increase in first lien purchase mortgages, from 3.9 million loans in 2018 to 4.04 million in 2019. Compared to refinances, this growth was modest because mortgage rates are often not the sole reason behind home purchase decisions. However, reduced mortgage rates can have a positive impact on origination activity by improving affordability. The CoreLogic Typical Mortgage Payment Analysis demonstrates how changes in interest rates can have a greater impact on affordability than that of changes in home prices. The Typical Mortgage Payment blog for December 2019[6] shows how, despite a 4% year-over-year increase in the median sale price, the typical mortgage payment fell by 6.8% because of a 20% decline in mortgage rates.

Second Lien Originations

Public record data shows home equity loan originations decreased year over year by 5% in 2019 to 1.72 million. Although still down from 2018, favorable interest rates attracted more homeowners, and originations increased by 27% from the first to the second quarter of 2019. However, slower home appreciation and high demand for refinances limited the year-over-year growth for second liens.

As more homeowners refinanced to take advantage of decreasing interest rates, the share of home equity and other junior standalone mortgages declined throughout 2019 after the first quarter (see Figure 3). 

Figure 3: Home Equity Loan Originations Decreased While Refinance Surged in  2019

Looking forward

When refinanced mortgages drive origination growth, we expect it to slow as rates level out. For instance, refinance volume abruptly declined 15% month over month in November 2019 and another 2% in December despite steady historic low home loan rates[7]. However, a decrease in home loan rates in January 2020[8] sparked a jump in refinance loan applications, most of which will appear as refinance originations in February. The Federal Reserve also slashed interest rates in March 2020, and we will see the effects of that decision over the next few months.

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[1] Average interest rate calculated from total purchase and refinance loan originations found in CoreLogic TrueStandings servicing data, weighted by dollar amount.

[2]  December 2018 had a weighted average interest rate of 4.96%, the highest since May of 2010, which was 4.97%.

[3] Mortgage prigination counts sourced from CoreLogic public records data.

[4] Senior purchase and refinance liens and home equity loans only. Excludes piggybacks and other junior liens.

[5] Mortgage origination counts sourced from CoreLogic public records data. Purchase and refinance mortgages exclude piggyback loans.

[6] https://www.corelogic.com/blog/2020/3/typical-mortgage-payment-u.s.-homebuyers-committed-to-in-2019-dropped-from-prior-year.aspx

[7] Refinance volume sourced for public decord data. Home-loan rates found in CoreLogic TrueStandings servicing data, weighted by dollar amount.

[8] Average FreddieMac Conventional Conforming 30-Year Fixed-Rate Mortgage decreased from 3.72% in December 2019 to 3.62% in January 2020.