Since May, when mortgage interest rates began climbing approximately 100 basis points to where it is today, prepayment activity—usually a good indicator of mortgage refinance activity—declined by more than 30% through August.
“As a result, the percentage of borrowers currently in loans with interest rates high enough for refinancing to make fiscal sense has decreased significantly,” said Herb Blecher, senior vice president at Lender Processing Services.
Over 50% of borrowers are now “out of the money” for refinancing, LPS stated, with 5.7 million loans having rates below today’s prevailing 30-year average. At the end of December 2012, approximately 10 million borrowers were eligible to qualify for a mortgage refinance.
Furthermore, HARP activity has also fallen, but it still makes up about 30% of all GSE originations.
“While higher interest rates may certainly have the effect of tamping down refinance activity, they may actually wind up contributing to a new appetite for home equity loans among homeowners,” Blecher added.
Analysis done by the Jacksonville, Fla.-based firm revealed that rising home prices and corresponding levels of equity for many borrowers could result in an appetite for home equity loans among homeowners.
For example, after home prices bottomed out at the beginning of 2012 at $202,000, LPS said national property values have rebounded substantially. As of June, the average home price across the country is now $229,000, which represents the highest levels in four years.
“Borrowers who bought or refinanced within the last few years are quite likely to have accumulated additional equity in their homes,” Blecher said. “Based upon LPS’ analysis of historical borrowing patterns and home value trends, it is possible that we could see an increase in second-lien borrowing among those who have locked in their first mortgages at very low rates and who wish to tap their equity without refinancing into a higher rate.”