There were 6.3% fewer refinances in the U.S. during the week ending May 15 — the largest weekly drop in May. Refinance activity has been on a steady decline and is down 17.4% from the four-week period ending April 17, according to the latest report by the Mortgage Bankers Association.
“Refinances are actually continuing to fall off a little, and rates are close to record lows,” said Joel Kan, associate vice president of industry surveys and forecasts at the Mortgage Bankers Association.
Mortgage interest rates remain at low levels, at less than 3.3% last week for 30-year fixed-rate mortgages, according to Freddie Mac, which would normally incentivize homeowners to refinance. But lending standards have become stricter. With uncertain economic conditions, mortgage lenders are raising lending standards: requiring higher credit scores and offering smaller loan amounts. The average loan amount for refinances dropped 7.9% to $299,400 last week — its lowest level since January — according to the MBA report.
“[Loan amount is] potentially a sign that part of the drop was attributable to a retreat in cash-out refinance lending as credit conditions tighten,” said Kan, referring to a homeowner’s ability to borrow money against the equity the homeowner has on the home.
This refinancing slowdown comes as mortgage applications for new home purchases skyrocket from pent-up demand in the market after the coronavirus lockdown paused home buying in March and April. Refinance was only 64.3% of total mortgage applications last week, compared to 67% the prior week.
“Tight lending standards do apply to purchase applications, but these borrowers are in a different place financially [than refinance applicants], financially and employment wise, if they are looking to buy a home,” said Kan. “It’s a segment of the population that’s not as impacted by the economic weakness, rather than the segment that, because of job loss, can’t get back into the market.”
Still ‘very healthy’
Despite the drop, refinancing is still up 160.3% compared to the same time last year. And refinance activity is not expected to slow to a halt.
Low mortgage rates should continue to incentivize refinances for the rest of the year. Lenders are expected to originate $1.2 trillion in refinances this year, 30% more than in 2019, said Kan, adding that the level of activity “is close to 2013 levels, and higher than in 2016… It’s very healthy.” Fannie Mae also forecasts that this year will record the highest level of annual refinance activity since 2012.
“COVID-19 will have a major impact on the mortgage markets but expect to see strong refinance volumes continue as interest rates remain low,” said Matt Komos, vice president of research and consulting at TransUnion.
Plus, as unemployment rises, Americans will look to reduce monthly mortgage expenses. At least 11% of TransUnion consumers are relying on refinancing as a means to help pay for current bills or loans during COVID-19, according to a TransUnion survey of over 2,000 Americans from May 4-5.
“With many homeowners still facing economic and employment uncertainty, these refinance opportunities will allow them to save money on their monthly payments, which can then be used to help other areas of their budgets,” said Kan.