Mortgage Refinancing Boom of 2015 May Not Be What It’s Cracked Up to Be

Ahead of 2015, financial experts had predicted that the U.S. mortgage market would experience a renaissance in terms of refinancing activity. However, that does not seem to be the case, after a very strong start that included the refinance share of mortgage activity climbing back up to around 70 percent in the Mortgage Bankers Association’s weekly reports.

Yet this story has been more interesting than a mere reversal of fortunes in terms of tangible statistics or the MBA’s easy-to-digest numbers most casual observers and consumers can relate to. To start out the year, U.S. mortgage bond holders were worried that refinancing activity would skyrocket in 2015, thereby reducing their securities’ value. However, investors did not find the need to re-protect against risk, the risk thereof being the chance of borrowers repaying mortgages ahead of time. This was because of an unexpected drop in premiums on mortgage-backed securities where the loans were not likely to be refinanced.

Mortgage Refinancing

The above mentioned easy-to-digest stats include mortgage interest rates, which hit 20-month lows in January and drove a significant increase in refinancing activity. But with 30-year fixed-rate products now carrying rates that are several basis points higher than they were last month, government-backed mortgage bond demand has increased, and refinancing may remain well below the crucial 70 percent threshold for the coming weeks or months.

After all, interest rate increases reduce concerns about prepayment, and good news for the bond market is conversely bad news for consumers, financial institutions, and other related enterprises. That proves that there really is more to the surprising lull in refinancing than basic numbers such as refinance share of activity and interest rates.

Going back to these basic statistics, refinancing applications on MBA’s records had increased by 84 percent in the last three weeks of January, but have dropped 30 percent since then. According to JPMorgan Chase & Co. (NYSE: JPM) mortgage head Kevin Watters, that would require that the purchase market perform extraordinarily well so that originations could hit the magic number of $1.2 trillion for calendar 2015. In calendar 2014, purchase and refinance originations dropped 34 percent to $1.24 trillion, the lowest number on record since 2013; refinances took up only 42 percent of those originations.

While interest rates remain relatively low compared to the highs reached in the stimulus taper-driven “summer spike” of 2013, the fact remains that they are slowly creeping up after starting 2015 on a downward trajectory. “The difference between a 3.75 percent and 4 percent rate is the equivalent of feast and famine for the refinancing market,” said Brean Capital fixed income strategy head Scott Buchta in a recent note. However, there are some advantages to these rate hikes, such as palliating the impact of the Federal Housing Administration’s decision to reduce its fees.

On the lenders’ end, this year’s refinancing trends do, if any consolation, look better than they were at a similar point last year. This is even if FHA refinances may not live up to expectations hitherto set for them. According to Equity Now operations manager Matthew Hackett, mortgage applications have been just as volatile as interest rates have been so far, “but the rates are still at a low enough point that we’ve been getting good application volumes.”