Refi Applications Down 43% Year-Over-Year: Is the Boom Over?

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As expected, the refinance boom is beginning to wane as interest rates continue to climb, now topping an average of 3.26% on conforming loans with 20% down, up from 3.23% last week.

We expected refinance activity to slow down this year. Still, a massive vaccine distribution effort, a reduction in the total number of active COVID-19 cases, and indications of a recovering economy have pushed refinance activity down faster than expected. Most experts in the beginning of the year anticipated the refinance market to stay strong through the end of quarter two.

Now, we face a different reality. The refinance market is on its way out faster than we thought, which means it’s important for mortgage lenders to prepare their transition into a purchase-heavy market.

Increased interest rates are now visually affecting the refinance market.

We’re starting to see sizable weekly drops in refinance activity, caused by rising interest rates shortening the number of borrowers who would benefit from a change-up in their mortgage rate.

Last week, home loan refinance applications fell 5% compared to the week prior, according to the Mortgage Bankers Association (MBA). Applications are also down a staggering 43% from the same week last year. While this data might sound sobering, it should be taken into context—think back to a year ago. We were diving headfirst into the reality of a worldwide pandemic, and financial markets began to falter. The result was a sizable bump in refinance activity as interest rates fell.

Even now, interest rates remain exceptionally low compared to historical standards. For example, the highest interest rate in 2019 peaked at 5.34%. The average in 2019 overall was 4.25%. Even though rates are accelerating in an upward direction, we’re still experiencing all-time lows.

But because the borrower pool is shrinking, refinance activity only accounted for 64.5% of loan originations over the past week, a 3% decline from the week before. Data from Black Knight suggests that 15% of borrowers have 30-year fixed first mortgages with an interest rate locked below 3%. As for the other 85%, roughly half of them have rates below 4%.

“Signs of faster economic growth, an improving job market, and increased vaccine distribution are pushing rates higher,” said Joel Kan, the MBA’s Associate Vice President of Economic and Industry Forecasting.

“The run-up in mortgage rates continues to cool demand for refinance applications. Activity declined last week for the fourth time in five weeks.”

On the flip side, the purchase market is heating up.

The purchase market has been active all year, but we expect to see more and more buyers enter as the pandemic calms down, led in large part by millennials and first-time homebuyers. Last week, mortgage applications to purchase a home rose 7%, which is 2% higher than they were this time last year.

“With the spring buying season at the doorstep, the purchase market had its strongest showing in four weeks, with gains in both conventional and government applications,” said Joel Kan.

Expect to see more younger buyers looking for loans. Last year, 38% of buyers were in the millennial age group. Even more will enter the market this year. Adding to their incentive, the idea of a $15,000 first-time homebuyer tax credit is still on the table at the White House. Studies have found that the tax credit would benefit renters significantly and help them enter the market.

The trouble is that we’re already dealing with low inventory. A flood of new buyers on top of the current demand would likely skyrocket prices even higher, making it difficult for many buyers to afford a down payment or their monthly mortgage costs.

With refinance activity dropping, experts expect profits to fall.

It’s a tough pill to swallow, but the reality is that experts anticipate profits to fall as refinance activity declines. For the second quarter in a row, a business sentiment survey conducted by Fannie Mae has found a larger share of mortgage lenders expecting their profit margins to contract in the coming months.

In Q1, 52% of mortgage lenders believed that their margins would decline. That’s up from 48% in Q4 of 2020. On the bright side, some remain optimistic. About 15% of lenders who took the survey think their margins are going to increase this year. While the industry would prefer that, it’s probably not going to be the case.

“Despite continued strong expectations for purchase mortgage demand moving forward, many lenders are signaling caution about their profitability and market competitiveness,” said Fannie Mae Chief Economist Doug Duncan.

“This quarter, the largest net percentage of lenders in the survey history are expecting a decrease in their profit margin outlook. Those who expected a lower profit margin cited competition from other lenders as the primary reason, reaching a survey high last seen in Q1 and Q2 of 2018, while a market shift from refinance to purchase was cited as the next biggest reason for the first time since Q4 2019.”

Another issued raised by Duncan is the upward pressure on interest rates reaching a point where it will dampen home sales. While yes, we’ve emphasized that the latest interest rates are still exceptionally low by all measures, continued growth will eventually slow down purchase loan originations as well, sending us back into a “business as usual” environment—similar to the one we experienced before 2020.

The refinance party is ending.

Moving forward, lenders will need to work on aspects of their business that they may have been able to look past as of late. As we hurdle into the purchase market, connecting with and creating relationships with real estate agents is an optimal strategy to collect consistent referrals for buyers who are looking to apply for a mortgage.

Luckily, we’ve created a free eBook on how to win agent business in 2021 packed with tips and tricks, as well as an inside look into the perspective of real estate agents and what they search for in lenders.

But there’s also other pillars of your business to bolster, so we’ve created a free guide on the six different areas for you to invest in your business so that you can maintain positive client relationships, increased revenue, and strong employee retention rates.

We’re here to help you prepare for the coming shift.

Download our free ebook “Winning Agent Business” to prepare your loan pipeline for the coming purchase market.