If you trust in Freddie Mac, next year isn’t going to be a great year for mortgage refinance volume.
The government-sponsored enterprise warned of a major refinance slowdown in its latest monthly Outlook for September 2017.
Apparently, the refinance share of mortgage applications will fall to just 25% in 2018, which will mark the lowest share since 1990. That’s nearly 30 years if you’re keeping track.
It will also equate to a big 23% slide in refinance applications since 2016, a potential problem for lenders that mostly rely on refis to bring in loans and make money.
Back in July 2016, the so-called “30-year fixed-rate conventional conforming rate refinance potential” stood at around $800 billion. A year later, it fell to $300 billion.
This is presumably the dollar amount of conforming mortgages that are ripe for a refinance, steadily falling thanks to rising mortgage rates and the fact that most already refinanced in the recent past.
It’s Just an Estimate
Hold on a minute though. Freddie Mac and other market watchers have been making these estimates for years. They also predict the direction of mortgage rates.
And guess what? Their forecasts have been off a lot lately. The mortgage market has shown its resilience time and time again, only to prove everyone wrong.
Freddie admits this, noting that refinance originations haven’t dropped as much as they estimated, though they are still down a whopping 48% in the first half of 2017 compared to the comparable period in 2016.
One bright spot is cash out refinances. Because home prices have risen so much lately, Freddie researchers reckon cash out activity is likely to rise as well.
During the second quarter of 2017, $15 billion in home equity was cashed out, a $1.2 billion increase from the first quarter, but still shy of the $19.1 billion total seen in the fourth quarter of 2016.
This number is expected to climb in 2018 as homeowners who can’t/won’t sell decide to take advantage of all that equity regardless.
That should give refinances a much-needed boost, even if the rate and term refinance numbers are dismal.
Of course, we might see more homeowners tapping equity with HELOCs instead, in order to preserve their low fixed-rate first mortgage.
Per CoreLogic, homeowner equity hit a staggering $8 trillion in the second quarter of 2017, which is more than double the level seen just five years earlier.
Still, 5.4% of all mortgaged properties remain underwater, but many are regaining equity fast, which could make them eligible for a refinance. In fact, another 500,000 homes could get back above water if home prices rise another five percent.
Freddie expects home prices to rise another 4.9% in 2018, compared to 6.3% in 2017 (through August).
Lenders Will Ease Up as Demand Fades
Also note that as demand for new mortgages goes down, lenders will loosen underwriting guidelines to bring in more business.
So those who may have had trouble qualifying for a mortgage in the past might have an easier time once application volume slows.
And as I wrote a week or two ago, it can sometimes be beneficial to apply for a mortgage when business is slow.
It’s possible to get a lower mortgage rate thanks to increased competition, and perhaps better service from a more available loan officer and his or her team.
There’s also the potential for more ups and downs as far as mortgage rates go. Sure, they’ve risen from recent lows lately, but given the geopolitical landscape, it’s pretty likely there will be another twist in the road.