The Refi Boom Is Officially Over — and Won't Return Soon
The share of mortgage applications for refinance loans has hovered above 50% since the first week in May, but that doesn't mean the mortgage industry is in the midst of another refinance boom, or even a boomlet.
In fact, Freddie Mac recently made its "official" call that the refinance boom ended in the second quarter of 2014.
"The housing market realized a significant shift in the second quarter of this year as refinance activity fell below 50% marking the onset of the first purchase-dominated market the industry has seen since 2000 and an end to the refinance boom that started in late 2008. We estimate over 25 million American borrowers refinanced their loans to the tune of over $70 billion in total interest payment savings," said Freddie Mac chief economist Frank Nothaft in a July 29 press release issued with the agency's quarterly refinance report.
But many industry observers said the secondary market agency is a year behind what's really been going on in the market. The rather rapid rise in mortgage interest rates in the spring of 2013 cooled both origination and refinance activity, leading many to claim the boom ended back then.
"You can point to last year, where we had a five to six week period where mortgage rates jumped almost a full percentage point and you saw a pretty quick retreat in refi volume after than happened," said Mike Fratantoni, chief economist at the Mortgage Bankers Association of America.
"The first six months of this year, rates have come down a bit from where they were in January," he added. "But we're in a space where most borrowers just don't have a lot of incentive to refinance."
Overall, mortgage production is down on a year-over-year basis. Refinance applications should be the main driver of a total production increase for that time frame.
"In order to have a refi boom, you have to have something that lifts the market," said Rick Sharga, executive vice president of Auction.com.
For the week ending Aug. 1, refi applications made up 55% of total app volume — the highest level since March — and up from 53% the previous week, according to the Mortgage Bankers Association.
There was a 4% increase in refi app volume, even though rates for the 30-year fixed-rate conforming mortgage gained two basis points over the previous week and for 30-year FRM jumbos, rates increased four basis points.
Interest rates were rather volatile at the end of that week. On July 31, the rate on the 30-year FRM as tracked by Zillow spiked at 4.23%, before retreating 20 basis points the next day.
"Rates temporarily jumped to the highest level in more than a month on the back of strong GDP growth figures, before cooling after weaker-than-expected jobs news," said Erin Lantz, vice president of mortgages at Zillow.
The recent rate movement likely brought consumers temporarily back into marketplace, but it's not the start of a new long-term wave. The average rate for 30-year conforming mortgages has steadily been above 4% for more than a year, and unless it drops below 4%, Fratantoni doesn't see the potential for a significant pick-up in refi volume.
With refinance activity plummeting for the better part of the last three quarters, Sharga suspects the timing of Freddie's declaration was tied to the slight cooling off of rates earlier this year and efforts by the Federal Finance Housing Agency to rekindle interest in the Home Affordable Refinance Program, currently scheduled to expire at the end of 2015.
"With all of that, we still haven't see refi activity come back up," said Sharga. "So this is putting a period at the end of a sentence and saying that it is pretty apparent to everybody involved right now that whatever refi boom we were looking at for the last couple of years is officially over at this point."
Freddie determines the beginning and end of a refi boom based on when the purchase share of mortgage applications exceeds 50%, based on the MBA's weekly mortgage applications survey, which includes data on both nonconforming and government loan applications.
Using that definition, the boom started in the third quarter of 2008. The nearly six-year duration is the longest refi boom since Freddie Mac started its quarterly refinance report in 1990. The refi share of applications fell below 50% during the week of May 2. But during the prior week, the MBA said total application volume was at its lowest point since December 2000. Interest rates later dipped to a six-month low, bringing the refi share of applications above 50% during the week of May 9, where they've remained ever since.
But it's difficult to define when exactly a refi boom begins and ends based on just the market share of refinance loan volume. If two periods of time have a similar refinance share but overall volume is down, it's hard to say the market is in the midst of a refi boom, said Sharga.
For example, the refinance share of total volume was 76% in the fourth quarter of 2012 and then dipped slightly to 74% in the first quarter of 2013, according to MBA data. But the dollar amount of overall volume dropped 12.23%, from $597 billion in 4Q12 to $524 billion in 1Q13, causing refi volume to slip by $65 billion.
A more indicative sign of a refi boom is when overall origination volume goes up year-over-year because of an increase in refinance activity, said Sharga.
MBA forecasts call for refinance origination volume to fall more than 60% year-over-year to $431 billion in 2014, with the refi share accounting for 43% of total originations, compared to a 63% refi share in 2013, according to the latest estimates released in July.
Since releasing its first 2014 forecast of $1.2 trillion in total originations in October, the MBA reduced its estimates in January, and again in May. Currently, the MBA forecasts $1.01 trillion in total volume for 2014. Last year, $1.1 trillion of the $1.8 trillion in origination volume were refi loans.
Total application volume is another important factor in defining the timing and duration of a refi boom. There are more refi apps right now than purchase apps because home sales have remained lackluster.