Refi picture continues to improve with candidates at two-year high

While not exactly a boom, the picture for the refinance business is brighter than it has been for some time. The recent drop in the 10-year-yield should help even more.

A week ago, the number of refinance candidates was already at a nearly two-year high, driven by easing bond yields and mortgage rates, said Andy Walden, Intercontinental Exchange vice president of research and analytics in a statement from last Thursday. Twice as many borrowers were in the money to be able to do a refi, with three times as many "highly qualified" candidates, versus a year ago, even as today's rates are at a similar level with that time.

On Monday, ICE Mortgage Technology's own data put the average 30-year conforming rate at 6.48%, its lowest level since May 2023.

That drop pushed the number of borrowers in the money to refi to 2.4 million, the most since April 2022. That was up almost 60% from a week ago, with another 900,000 borrowers gaining refi incentive, Walden said in an update on Monday morning.

Zillow's rate tracker put the 30-year fixed rate mortgage at 5.98% at 11 a.m. Monday morning, down 19 basis points from the previous week's average.

Since Aug. 1, when the 10-year Treasury broke below 4% for the first time since Feb. 2, the yield has continued to decline, and was at 3.76% as of 11 a.m. Monday.

Based on recent spreads, it would put mortgage rates in the 6.39-6.44% range. (Optimal Blue had the spread at 260 basis points as of Aug. 1.) Rates for the 30-year would need to fall to 6.37% for a significant boost in the population, which would provide a refinance incentive to another 400,000 borrowers, Walden said.

With the continuing turmoil in the stock market triggered by a weak jobs report on Friday, the Dow Jones Industrial Average was off by over 953 points at the same time, helping fuel the move into bonds. When bond prices increase because of demand, the yield falls.

Bank of America Securities analysts said the Federal Reserve missed the opportunity for a rate cut last week because of its "data dependency/rear view mirror approach" to the markets.

"Due to the Fed dawdle, the risk scenario of 3.25% [10-year Treasury yield] that we have highlighted in recent weeks and months now appears inevitable," a commentary from Chris Flanagan and Henry Navarrete Brooks said. "Mortgage rates are likely to drop below 6% in this scenario, a positive for housing turnover."

Even before the markets sank to these depths, some were already seeing more opportunities for refis.

Optimal Blue's market data for Aug. 1 put the share of refi locks at 21.3%. Its Market Volume Index for cash-out locks was at 11 and for rate-and-term refis, it was at 14; activity for this purpose alone was up over 52% from the previous day.

End of June data from Optimal Blue put the refi share at 16% of the market, with the cash-out MVI at 8 and the rate and term at 7.

BTIG issued an update to its mortgage originations forecast on Aug. 5, which kept its 2024 purchase outlook in the area of $1.3 trillion, a 3% year-over-year gain.

But it upped its refi projections to $327.9 billion, a 30% annual gain, versus the 22% increase it foretold in June. That being said, it is still more conservative than either Fannie Mae or the Mortgage Bankers Association, which is predicting $346 billion and $431 billion in refis respectively.

BTIG created its own framework to contemplate the size of a potential refi market. It gives a higher probability (up to 50%) if the loan rate is 50 basis points or more in-the-money and a 33% chance if it's less than that.

"We acknowledge that this isn't perfect but it at least provides us with a ballpark estimate of where term refi could be absent modeling each cohort based on potential prepayment speeds," Soham Bhonsle, an analyst at BTIG said in a report. "Net-net what we estimate is that if rates were to fall to the 6%-6.5% range, there could be about 1.9 million refiable loans or $680 billion in dollar terms."

Meanwhile, tappable home equity also hit a record high, Walden said in a press release for ICE's Mortgage Monitor report for August.

Outstanding mortgage debt hit an all-time high of $13.8 trillion in June, ICE said. But because of rising prices, mortgage holder equity reached its own record high of $17.6 trillion in the second quarter.

Tappable equity, which ICE defines the amount a borrower can access while maintaining a 20% cushion, rose to a high of $11.5 trillion in June, up 4% from the first quarter and 9.2% on the same day last year.

Approximately 32 million people with a mortgage can tap at least $100,000 in equity; 4.6 million have $500,000; and 1.2 million can access $1 million or more.

This can be accessed several ways, including through a cash-out refi or via closed- or open-end home equity products. But given that two-thirds of those with tappable equity also have first mortgage rates at 4% or below, they are more likely to turn to the latter products.

"As the Fed raised short-term lending rates, accessing equity became more expensive for homeowners, evidenced by the anemic growth in such lending despite record levels of available, tappable equity," said Walden.

"Industry expectations that the Fed will soon begin easing short-term rates could gradually change that dynamic, given the more direct impact short-term rates have on home equity rate offerings, and lenders would do well to prepare."

At the other end of the equity spectrum, fewer than 325,000 homeowners are underwater on their mortgages, putting just 0.6% of active loans in a situation where the borrower owes more than it is worth. Another 4.2% have an equity position in their properties of under 10%.

That is in-line with a recent report from Attom.

ICE warned that Texas, Florida and Louisiana are worth watching for increases in underwater borrowers as inventory grows and home prices soften in some areas.