Mortgage refinance applications sink amid interest rate hikes: ‘You see things turn in a penny’

CLEVELAND, Ohio — Rising interest rates have cut refinance demand by more than half in just a few months, essentially ending a refinance boom and drying up demand from mortgage lenders.

According to data from the Mortgage Bankers Association, refinancing accounted for 64% of all mortgage applications in December. In April, it was only 36%.

The change is not due to the boom in home sales and the first mortgages that come with them. This is because requests for refinancing have fallen by 57% since December and by 68% compared to the average for all of 2021. Higher interest rates have made refinancing less advantageous.

Weak demand for refinancing has put lenders at a low point in what is typically a cyclical industry. This, in turn, led to suddenly overstaffed mortgage lenders and staff reductions.

“A lot of companies have kind of hired staff and increased their capacity to handle this refinancing activity, and now you’re seeing things spinning around,” said Joel Kan, vice president of economic and industry forecasts at Mortgage Bankers. Association.

In 2021, more than half of the money lent on mortgages was for refinancing ($2.35 trillion of the $4 trillion), according to MBA forecasts.

Mortgage applications fell sharply due to rising interest rates,Sean McDonnell, Cleveland.com

Very weak demand as rates rise

Mortgage applications for new homes tend to be flat, according to MBA data. But demand for refinancing can fluctuate wildly over a short period of time and is largely based on rates.

Kan explained that refinancing really depends on the current owner’s ability to save money.

At a historically low 30-year fixed rate of less than 3%, it makes perfect sense to refinance. At 5% or more, it’s not, he said. Also, many people who were going to refinance have probably done so in the past few years.

A refinancing boom started just before the COVID-19 pandemic and lasted until 2021.

Refinancing accounted for almost two-thirds of all mortgages in 2020 (66.5%) and 2021 (65%), according to Kan. Rates were below 4% before the pandemic and continued to decline during it, eventually reaching the 2.8% range.

But lately, the Federal Reserve has been raising interest rates to fight inflation, which has led to 30-year fixed mortgage rates above 5%.

According to MBA data, requests for refinancing increased by 110% in 2020 compared to 2019. Requests for refinancing increased by 88% in 2021 compared to 2019.

In April, average claims were down 40% from the average for all of 2019.

The MBA Market Rate Index, which combines refinancing applications and new mortgage applications, fluctuated less, but was affected by lower refinancing demand.

Total mortgage applications have increased by 63% in 2020 and 50% in 2021, compared to 2019. So far in 2022, they have decreased by less than 1% compared to the average demand in 2019.

Mortgage lenders have cut staff in response. Both Wells Fargo and Rocket Mortgage have cut employees, either through layoffs or buyouts. Strongsville-based Union Home Mortgage also recently laid off workers.

Mortgage industry cycle

Refinance demand is much weaker today compared to the past two years, but it is not uncommon for demand to drop.

Kan said mortgage applications are cyclical in nature. The number of applications saw huge spikes in 2008, 2009, 2010 and 2012. Each increase in applications was followed by a sharp drop, according to MBA data.

These last two years are not even records. In 2012, 78% of home loan applications concerned refinancing. From 2009 to 2011, the share was 70%. Data provided to cleveland.com dates back to 2005.

Kan said the refinancing request is likely near bottom. The MBA forecast does not expect mortgage rates to get much higher than they are now.

The Federal Reserve does two things to reduce inflation which affects interest rates. It increases the rate that institutions charge each other for short-term loans and it reduces its investments, which include mortgages.

Kan said investors, who must provide the capital for mortgages, are holding back, so interest rates are more volatile than normal. He said the rate should stabilize when things are more certain.

“It’s going to be weeks or months before we see how the markets pick up on this,” Kan said.

The MBA forecasts around 2.23 million refinance mortgages in 2022, up from 6.4 million in 2021. Total mortgages, including new purchases, are expected to be around 6.8 million, down from 11.3 million in 2021.

New mortgages are expected to decline about 7% in 2022, but remain flat through 2024. As homes become more expensive, the total amount loaned is expected to increase further.

MBA projects that 30-year fixed mortgage rates will return to 4.3% in 2024.

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