Prepayments hit two-year high as incentivized borrowers act

The rate at which consumers prepaid their home loans soared to heights not seen in 24 months in August, suggesting most of those identified as having incentives to refinance did so.

The prepayment rate of 0.62% was nearly 5% higher than July and up 18% from a year earlier, in line with previous estimates suggesting roughly that many borrowers had a rate incentive of at least 75 basis points, according to ICE Mortgage Technology's latest First Look report. 

That borrower responsiveness suggests that refinance prospects may continue to be quick to act if rates do move any lower, with the average 30-year fixed mortgage recently in the low 6s and many loans originated in recent years closer to 7%.

But there continue to be questions about how quick borrowers will be to refinance given some may fence-sit in anticipation of lower rates in the future.

How homeowners view signals from the Federal Open Market Committee which pulled the trigger on a short-term rate cut this month — and what their mortgage companies say about it — may impact that.

Servicers have been concerned about both prepayments and delinquencies picking up in a lower rate environment, but the latest data from ICE Mortgage Technology shows that although both showed notable increases recently, they remain historically low.

Serious delinquencies, defined as borrowers that haven't paid their loans in 90 days or more but aren't in foreclosure, rose to a six-month high of 450,000 last month.

That may be in part because foreclosure alternatives have proliferated since the pandemic and pushed more loans into the serious delinquency bucket than in the past.

The average delinquency rate of 3.34% was down 3 basis points form the previous month due to declines in shorter-term arrears, but up 5.1% from a year earlier.