There’s been a lot of fuss about the refinance market drying up lately, and we now know it’s not just noise.
Last month, purchase-money mortgages gobbled up the majority share of the overall mortgage market, according to the latest Origination Insight Report from Ellie Mae.
The company noted that purchases accounted for 53% of applications in July, up from 49% in June and 42% a year earlier.
The worst month for purchases in recent history occurred during January of this year, when they accounted for just 27% of the mortgage market.
Since then, they’ve steadily climbed higher into the traditional home buying season, while refinances have retreated amid higher rates.
Refinances Peaked in January with 73% Share
What a difference half a year makes. Refinances snagged an astonishing 73% of the mortgage market in January, but since then have seen sequential declines just about every month.
The only bright spot for refis was HARP-related, with high loan-to-value loans (95%+) rising three percent from a month earlier.
However, market watchers expect the overall numbers to move in much the same direction for a while, with refinances eventually slipping to a sub-40% share in 2014.
Unfortunately, most homeowners have already taken advantage of the low rates, with only 55% of existing mortgages currently at above-market rates (not all stand to benefit from a refinance).
Then there’s those who procrastinated and missed the boat, with many presumably considering adjustable-rate mortgages as an alternative.
That’s not just speculation – the ARM-share increased to 5.2% of closed loans in July, up from 4% in June and 2.1% back in January.
Meanwhile, the somewhat en vogue 15-year fixed is beginning to lose its luster, with only 15.5% of borrowers opting for a short-term fixed loan, down from 16.5% a month earlier and 16.9% at the start of the year.
This market shift is also obliterating the mortgage industry, with layoffs beginning to make the headlines seemingly every day.
The latest causalities come from top mortgage lender Wells Fargo, which announced another 2,323 job cuts nationwide, including 365 in Birmingham, 330 in offices around Orange County, CA, and another 292 in Phoenix.
These layoffs are on top of additional job cuts announced last month.
Many other banks have been slashing mortgage workforces as well, which is no surprise given the sharp drop-off in origination volume.
It’s so bad that it almost feels like 2007 all over again, with the bad news forcing me to work on my list of layoffs and closures much more these days.
Credit Is Easing in Mortgage Land
Despite that, credit conditions seem to be easing for home loans. Last month, the average FICO score for a closed loan was 737, down from 742 a month earlier and 749 in January. The average FICO score for all of 2012 was a very high 748.
Additionally, only 75% of closed loans in July had FICO scores of 700 or higher, compared to 83% a year ago.
In other words, credit standards seem to be falling as mortgage lenders grapple with lower production numbers, whether that’s correlated or not.
For denied applications, the average FICO score was 702 last month, which probably wasn’t the sole reason the loan was declined.
Lastly, both LTVs and DTI ratios increased in July, signaling credit easing and/or a lower quality borrower. But it certainly helps now that both mortgage rates and home prices are much higher than they once were.
Of course, this shift also kind of reminds me of the previous crisis, though nowhere near that same level…yet.