A diminishing share of refinances is good news for investors of residential mortgage-backed securities that are filled with jumbo home loans.
Spiking interest rates have hurt demand for refinances. As activity shifts from refinances, the share of purchase business has been bolstered.
The Mortgage Market Index report from Loan Sifter and Mortgage Daily indicates that as conforming 30 year fixed rates have soared from 3.6 percent in May 2013 to 4.6 percent last week, refinance share has plunged from more than 70 percent to less than half.
A report from Moody’s Investors Service, Slowdown in Mortgage Refinancing is Credit Positive for New Jumbo RMBS, predicts that mortgage rates will average 5.2 percent in 2014, 5.9 percent next year and 6.4 percent in 2016.
Moody’s projects that refinance share will fall to 26 percent this year, 17 percent in 2015 and 13 percent in the following year.
“Rising interest rates have caused a drastic drop in mortgage refinancing applications since mid-2013,” Moody’s Vice President and Senior Analyst Peter McNally said in the report. “This number will continue to fall as interest rates rise.”
The report says that a higher purchase share in jumbo RMBS could persist for “several years.”
The New York-based ratings agency describes the transition from refinances to purchases as positive for jumbo transactions.
McNally noted that purchase borrowers tend to get more scrutiny by originators than refinance customers because purchase transactions are their first loan review.
“Originators have typically subjected purchase loan borrowers to stricter credit reviews and property valuations,” the report stated.
Data on Fannie Mae loans showed that while refinance loans had a default rate exceeding 20 percent in 2007, the rate was less than 13 percent on purchase loans.
Loans owned or guaranteed by Fannie’s secondary rival Freddie Mac exhibited similar performance characteristics, with refinance loans nearly reaching a 19 percent default rate and purchase loans staying below 16 percent.
“Even first-time purchasers have outperformed refinancers, despite lower FICOs and higher LTVs than non-first-time purchasers,” the report said.
Purchase financing to borrowers with stronger credit profiles becoming a bigger share of jumbo RMBS is “a credit positive for pool performance.”
Another positive is the decline in cashout transactions, which McNally said involves borrowers who need cash and contribute to higher default rates.
“In the refi component, cashout borrowers are generally weaker than rate/term borrowers because the very fact that they are taking equity out of their homes means that they are more likely to be strapped for cash,” the report said.
On Fannie loans, cashout refinances had a default rate exceeding 21 percent in 2007 versus less than 13 percent on purchase loans.
Freddie’s cashout default rate was nearly 20 percent in 2007 compared to less than 16 percent on purchase mortgages.
