When interest rates hit record lows in 2003, mortgage bankers originated a record level of loans. Today’s rates are even lower — yet volume this year is expected to come in at less than half of 2003’s level.
In its August Economic Outlook, Freddie Mac noted that nearly $4 trillion in new mortgages were originated in 2003 when rates hit a record-low 5.21 percent. A look at the secondary lender’s prior data indicates residential volume came in at $3.850 trillion that year. The outlook explained that 70 percent of 2003’s production was refinance activity.
Freddie said FHA-insured mortgages had contract rates less than 4.5 percent between 1949 and 1952, while conventional rates were probably near that level.
Last week, Freddie reported that the average 30-year fixed-rate mortgage was 4.49 percent, while the 15-year averaged 3.95 percent. Given today’s declining 10-year yield — to 2.706 percent during trading today from 2.98 percent at the market’s close last Wednesday — mortgage rates have cut further into record territory. And Freddie sees no reason for any quick rise in rates, though they are unlikely to fall further.
Given that rates are at or below the lowest levels in more than half a century, refinance originations would be expected to be substantial. And while the refinance share is up to 70 percent — originations are not out of the ordinary. In fact Freddie’s forecast for this year is less than half of what was originated in 2003.
Freddie said cash is one reason that a tsunami refinance wave has not been triggered by fixed-mortgage rates that are flirting with the threes. The secondary lender cited data that around a quarter of real estate transactions this year are all-cash. Several years ago, just 5 to 10 percent were all-cash.
In addition, more than one-in-five borrowers who are refinancing are paying down their mortgages as part of the transaction. That share was less than 15 percent in 2003. The motivation to pay down mortgages is sometimes tied to low yields on other investments and other times tied to meeting loan-to-value requirements for preferred rates.
Another reason for lackluster originations is the lack of qualified borrowers. Some aren’t qualifying because falling home prices have pushed their LTVs above qualifying levels. Freddie said that the Home Affordability Refinance Program is a good option for borrowers in this category. HARP originations totaled nearly 200,000 loans during the first-half 2010.
Others borrowers have depleted their cash and don’t meet cash reserve requirements.
Freddie also pointed to second lien lenders who are not submitting re-subordination paperwork quickly and delaying or killing refinance transactions.
One other factor is declining home values that are scaring away potential homebuyers. Purchase transactions are down 25 percent from 2003’s level.
“Consumers still seem nervous about investing in homes and, absent big incentives, they are inclined to remain on the sidelines.,” Freddie said.
