Refinance Candidates Are Getting Harder to Find

For the time being mortgage rates remain historically low, which is a good thing for potential borrowers looking to purchase a home or refinance their loan. Still, the weekly average for 30-year mortgage rates gathered by Freddie Mac (FMCC) shows rates rose from 3.1% in December to over 3.5% earlier this month. For lenders, the impact will be felt most immediately in terms of potential refinance deals.

Data from mortgage technology and data provider Black Knight (BKI) says the number of people who qualify as good candidates for refinance has fallen from 11 million to 6 million since the start of January. The prospect of rising rates has led to a flurry of activity amongst homeowners looking to refinance. Analysts say in order to dig deeper into the refinance market, lenders will have to take on increasingly riskier credit profiles.

Cash-Out Refinance Could Be Key Going Forward

Some argue whatever slowdown is experienced in the traditional refinance market can be supplemented by cash-out refinance activity. Equity growth attributed to rising home prices provided home lenders with around $10 trillion of tappable equity in 2021. Data does show borrowers are taking money out of their homes more often — balances on home equity lines of credit rose in Q4 2021 for the first time in five years.

Offering expanded cash-out refinance products could help larger lenders like Rocket (RKT) and UWM Holdings (UWMC) keep pace, while market observers also note the housing market remains strong. Purchase applications are down just 7% compared to this time last year. Supply and inventory of homes is also especially tight, and some analysts say that will start to ease.

Competition Driving Rates Lower?

There’s an argument among some investors that a renewed focus on cash-out refinance and new purchases will make mortgage companies healthier by the next time a major refinance cycle takes place. Still, such long term thinking doesn’t seem to be swaying the thinking of most equity traders. Stocks like Rocket and UWM were down 10% for the year as of earlier this week.

For the time being, increased competition is likely to mean better rates for borrowers. This means the average gain-on-sale margins will continue to fall for lenders, harming their bottom line. It’s a situation that mortgage originators will have to carefully navigate, particularly given that interest rates are likely to rise, but it does provide borrowers with opportunities given that rates are still comparatively low on a historical basis.

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