Purchase locks increase in the face of rising rates

Purchase lock activity pointed to steady demand amid accelerating mortgage rates last month, but movement toward government and nonconforming options also suggest a changing buyer profile, according to Optimal Blue.

Lock volumes for new home purchases rose 11.6% from September to October, data from the product pricing engine platform's monthly report showed. The rise reflected a second consecutive monthly gain for purchase locks over a period when the most frequently used mortgage rates surged between 41 and 73 basis points. Year over year, lock activity was higher by 17.2%. Lock counts also increased 9% on an annual basis.  

"We saw strong growth in both purchase lock volume and counts, which are both positive signals for mortgage production," said Brennan O'Connell, director of data solutions at Optimal Blue, in a press release. 

A significant drop in refinance lock activity drove overall volumes down by 1.6% on a monthly basis, however. The refinance share diminished to 23% of activity from 32% in September. 

While cash-out transactions managed to pull out a 5.6% gain, rate-and-term refinances plummeted 45.1%. Still, the drop in rates prior to last month's upswing left refinance levels at their third-highest point since April 2022, surpassed by only August and September 2024 numbers.

Cost constraints are changing the profile of current borrowers, O'Connell noted. The share of conforming-rate locks across both purchases and refinances shrank to its smallest slice since at least 2018, as borrowers attempted to navigate current housing market headwinds. 

The conforming share diminished to 52.8% of total volume from 54.4% a month earlier. Meanwhile, Federal Housing Administration-backed mortgages, which are typically used for lower-priced properties, grew to a 19.7% share, up a full percentage point from 18.7% in September. 

Non-QM and jumbo categories also grew as borrowers looked for alternative solutions in the current housing market. The share of locks for nonconforming products expanded to 15.1% up from just over 12.5% in September.

Borrowers might turn to FHA and other nonconforming categories for more flexible financing terms, Optimal Blue said. "While purchase growth is encouraging, signs of how buyers are adapting to higher rates indicate continued affordability pressures." O'Connell added.

At the same time, one category of government lending declined, as Department of Veterans Affairs-backed rate locks contracted to 11.7% from 13.7% month over month. 

Optimal Blue's overall measure of lock activity inched down a notch but managed to maintain much of its early-fall resilience. The index finished October with a reading of 104 compared to 105 in September but was up from 99 in August. Purchases came in with a score of 80. The cash-out refinance category landed at a mark of 11, while rate-and-term had a score of 13. 

Recent upward movements in mortgage rates since the 2024 election, though, show little signs of changing direction that might lead to increased November borrowing activity. 

Credit quality among new buyers remained strong in October, with the average rising by a single point to 739 from the previous month, Optimal Blue found. The average was also four points higher from where it stood a year ago.

Credit scores among the latest refinance borrowers deteriorated. The rate-and-term average dropped six points from September and eight from the same month in 2023 to 730. Credit scores of cash-out borrowers decreased one point from the previous month to 698, but the number still reflected improvement by 10 on a year-over-year basis.