The second quarter of this year was a miserable on many
levels, but mortgage origination volume was not one of them. Black Knight’s
current Mortgage Monitor reports that the second quarter saw the largest
quarterly origination volume since the company began tracking it at the beginning
of 2000. Low interest rates drove refinancing up by more than 60 percent
compared to the previous quarter and 200 percent higher than in the second
quarter of 2019. There were $1.1 trillion in first lien mortgages originated during
the period, 70 percent of it through refinancing.
The 2.3 million refis in the second quarter were
dominated by rate/term refinances which saw a four-fold increase from a year
earlier Cash-out refinances increased as well, up by 66 percent, but had only a
30 percent share of refinance originations, the lowest in more than six years.
Borrowers who opted for cash-out refinancing did so in a relatively modest way,
withdrawing an average of $62,000 in equity, the lowest since late 2016. Still,
the sheer volume drove the aggregate equity tapped to $44.6 million, more than
a 10-year high.
Despite wide-spread business closings and shelter at
home orders, purchase lending also did remarkably well. Originations were down
8.0 percent, but there was still about $351 billion in volume. After an understandable sharp downturn in
closings in May purchase demand returned more quickly than many expected. The
company says, with interest rates remaining below 3.0 percent for much of the
third quarter to date, it expects origination volumes to climb even higher.
Rate lock data supports that theory. It indicates that
purchase originations will reflect a delay in the homebuying season from the
second until the third quarter this year and provides some clarity of the
impact the COVID-19 pandemic has had on purchase lending.
In the second quarter purchase locks scheduled to
close in the second quarter fell 10 percent below expectations as the pandemic
took hold. So far in the third quarter (which ends on September 30) those locks
have rebounded by 37 percent. This bucks the historic trend in which purchase
lending peaks in Q2. Thus, rate locks scheduled to close this quarter are 23
percent higher than seasonal expectations, and, combined with Q2, are 6 percent
higher than the expected volume during those six months based on January’s
Refinance rate locks are also promising. Assuming a
45-day lock-to-close timeline, closings could be up 20 percent in the third
quarter compared to Q2.
Black Knight Data & Analytics
President Ben Graboske said, “Purchase locks in Q3 2020 have already made up
for the losses of a COVID-impacted Q2 – and then some – based upon normal
seasonal expectations. In fact, rate locks are suggesting that we could see Q3
purchase lending break typical seasonal trends and rise by 30-40 percent, which
would push us to a new record high. Likewise, while Q2 refinance activity was
record-breaking, refi lock data suggests Q3 refinance volumes could climb even
“With market conditions as
they are and given the recent delay of the 50-basis points fee on GSE
refinances until December, we would expect near-record low interest rates to continue
to buoy the market. After all, there are still nearly 18 million homeowners
with good credit and at least 20 percent equity who stand to cut at least 0.75
percent off their current first lien rate by refinancing.”
But, while refinancing is booming, servicers
continue to face retention problems. Black Knight says they hung on to only 18 percent
of borrowers who refinanced during the second quarter.
Fifty percent of mortgage prepays are coming from mortgages
originated win the last three years. The
2018 vintage has the highest prepayment speeds of any vintage in more than a
decade, but borrowers refinancing out of loans originated in 2019 make up the
largest share of refinances, 20 percent of the total. This means that vintage
should be one focus of retention efforts.
The data further shows that, though rate/term refinance
borrowers are indeed price-sensitive, high-credit borrowers refinancing into
GSE mortgages in Q2 received an interest rate only 7 basis points lower on average
than borrowers who were retained.
Black Knight says that, while pricing is certainly important, the marginal rate
differences between retained and lost borrowers suggest that proactively
identifying and marketing to high-risk prepay cohorts may likely be key to
raising retention rates.
The company concludes that, with
interest rates so low, the stakes become even higher. A 5-point gain in
retention rates could mean the holding on to 100,000 additional borrowers
across the market in a single quarter.
The Mortgage Monitor also looked
at delinquencies and forbearances amid the pandemic. The information is much
more detained than in Black Knight’s weekly forbearance report and deserves more
attention; it will be covered separately.