WACs Point to Less Churning
With interest rates averaging just about 5.8% for prime credit quality, 30-year, fixed-rate mortgages in late January, refinancing continued to account for about half of the loan origination market.
But that is not expected to last. Housing industry economists say that a combination of gradually rising interest rates and a dwindling supply of homeowners whose existing mortgage exceeds the current market rate will cause refinancing to taper off this year after an unprecedented three-year boom.
The three largest mortgage servicers - Washington Mutual, Wells Fargo and Countrywide - all reported that the weighted average coupon (WAC) in their portfolios fell during the third quarter, reflecting the impact of last year's record breaking refinancing boom. Wells Fargo's average WAC dipped below 6% to 5.98% in the third quarter. Countrywide and WaMu both had WAC's of about 6.1% at that time. Fourth-quarter data, which had not been released as this edition of Mortgage Servicing News went to press, will likely show a continuation of the downward trend.
Data collected by MSN's affiliate, the Quarterly Data Report, show that the trend toward lower WACs has continued. At the end of the third quarter, most of the lenders with the highest WACs, which includes some supbrime firms, reported that their WAC had declined by more than 10% from a year earlier (see related table, page one).
Frank Nothaft, chief economist at Freddie Mac, said he expects refinancing volume to decline by about 60% from last year's torrid pace over the course of 2004.
By the fourth quarter of this year, Freddie Mac predicts that refinancing will account for about 37% of loan applications, with much of that being driven by cash-out refinancing activity.
Last year, refinancing accounted for an estimated 65% of the approximately $3.7 trillion of single-family home loans that were made, he said.
"I don't think we are going to see refinancing volumes anywhere near where they were this time last year," Mr. Nothaft said. Freddie Mac expects the average 30-year mortgage rate to rise to about 6% by the end of the year.
Even if rates hover at their current level, however, he said the industry will see "a dwindling pool of borrowers who have a financial incentive to refinance."
While refinancing may hover around the 50% mark during the first few months of 2004, he expects that gradually rising interest rates and a burnout of candidates who can improve their rate and term by refinancing will cause volume to taper off.
On the other hand, Freddie Mac expects home purchase lending to remain as strong and perhaps even stronger than it was last year, he said.
He said the complexion of refinancing will change over the course of the year, with borrowers who cash out some of their equity accounting for most of the refinancing in the second half of 2004.
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