Refinanceable Population Takes Another Big Hit

Early in December, Black Knight Financial Services reported that the rise in mortgage rates had reduced the refinanceable population by more than half, from 8.3 million down to 4 million.

Now with Freddie Mac reporting for the week ending December 8 that the average 30-year FRM had increased another 5 basis points up to 4.13 percent, the highest point in 2016, Black Knight reported on Monday that the refinanceable population (number of borrowers who are likely to benefit from, and qualify for, a mortgage refinance) had been reduced by another 700,000 borrowers down to approximately 3.3 million.

According to Black Knight, only twice in recent history has the refinanceable population been this low—in the back-to-back months of December 2013 and January 2014. In Q1 2014, refi volume fell to its lowest point in a decade and was 60 percent lower than the refi volume in Q3 2016, the most recent quarter for data available, according to Black Knight.

“In a nutshell, rate/term refis will likely fade away if rates continue to rise,” Black Knight EVP Ben Graboske told MReport. “The last time we saw the refinanceable population this low, refi origination volume fell to about 55 percent below what it was in Q3 2016, so we may be looking at a sharp drop off in the months ahead.”

Graboske continued, “We’ll also likely see cash-out refis make up the majority of refinance originations for the first time since 2008. Cash-outs were already making up over 40 percent of the refi market prior to the rate increases, and that share is likely to jump as rate/term refis fall out of the market. In fact, there’s noticeable burnout in the refinanceable population, which suggests we may actually see volumes drop more than 55 percent this time around, since many borrowers with the interest and incentive to refinance have already done so.”

Freddie Mac Chief Economist Sean Becketti noted in early December at the time that the rates jumped above 4 percent that “With mortgage rates at the highest we've seen this year, borrowers are now backpedaling on refinance opportunities.”

Graboske said in the company’s October 2016 Mortgage Monitor that the decline in refi volume could potentially affect mortgage performance.

“Since higher interest rates tend to reduce the refinance share of the market—specifically in higher credit segments—which typically outperform their purchase mortgage counterparts, they may potentially impact overall mortgage performance as well,” Graboske said.

Zillow Group VP of Mortgages Erin Lantz said, “Consumers considering buying or refinancing now should stay patient, as we'll likely see rates stabilize once markets find a new equilibrium.”