What a difference a year makes, at least when it comes to the potential size of the home refinance market.
A new analysis from Black Knight Financial Services revealed that 7.1 million borrowers now stand to benefit from a mortgage refinance, as of data from the end of February.
That number is up by approximately three million when compared to the 4.1 million borrowers who were ripe for a refinance a year earlier. So why has it nearly doubled you ask?
The company said much of the increase can be tied to recent mortgage rate improvements; per Freddie Mac, rates on the oft-selected 30-year fixed mortgage have fallen about five-eights of a percent over that time from around 4.375% to 3.75%.
As a result, lots of borrowers who were on the fence have been pushed to a more obvious beneficial position, though that doesn’t necessarily mean they will all act upon it.
That, along with new lower LTV options like the Freddie Mac Home Possible Advantage program, mean more borrowers may actually qualify for refinances at these new low rates.
Rates Subject to Change
However, mortgage rates may rise just as quickly as they have fallen, meaning the refinance population could easily be halved just like that.
Clearly this represents a challenge for banks and lenders, which seem to be having difficulty aligning staff with projected mortgage volume that is constantly in flux.
More importantly, the yo-yoing rates have made it tricky for borrowers to time a refinance, and if rates climb back to recent highs, millions may no longer benefit.
In fact, a mere 50-basis point rate increase (e.g. 3.75% to 4.25%) could shut out three million borrowers in the blink of an eye.
And as I mentioned back in March, rates can move very fast, so it’s not out of the question to see that kind of rate movement in coming months.
Low Credit Score Homeowners Stuck?
Another concern is that homeowners with low credit scores aren’t able to refinance in the current market.
While it’s debatable how difficult it is to get a mortgage these days, those with credit scores below 620 seem to be having a lot of trouble.
Black Knight discovered that prepayment speeds (generally a good indicator of refinance activity) of borrowers with sub-620 credit scores were the lowest they’ve seen since the company began tracking such data in the year 2000.
The average loan age for this subset of the population is 98 months, or more than eight years, compared to just 38 months for homeowners with credit scores of 750 or higher. That’s odd given how low rates are at the moment.
Traditionally, a 620 credit score is the subprime cutoff and the minimum score accepted by Fannie Mae and Freddie Mac.
However, certain programs like HARP allow for sub-620 credit scores and the FHA doesn’t have a minimum credit score for its streamline refinance program, though individual lenders often impose overlays.
In any case, the takeaway is that these borrowers aren’t refinancing nearly as much as the good credit borrowers, which is a shame seeing that we may never see rates this low again.
Whether that translates to more foreclosures down the road is unclear, but Black Knight did also report that distressed sales in 2014 were the lowest since 2007.
And 2015 might be a great year to sell for some folks.
Read more: The Refinance Rule of Thumb