Mortgage loan rate lock activity slips in May

Mortgage loan rate locks fell on a month-to-month basis across all purposes in May and a big drop in cash-out credit scores offers an ominous sign of economic upheaval, a Black Knight report found.

Total rate lock activity, an indicator of future mortgage originations, declined by 4.8% in May from April, likely resulting from volatility during the month, according to Black Knight's Market Volume Index. At one point, Black Knight's Optimal Blue unit tracked the 30-year fixed at over 5.5% during May but by month’s end, rates moved back down to 5.34%, which was 7 basis points lower than April.

The steep decline in locks for rate and term refinance loans led the way, down 23.9% compared with April and by 89.9% from May 2021.

Cash-out refi locks, a mortgage purpose that is driven more by the borrower's need for funds, were down by 11.9% from the prior month and by 42.2% versus one year prior.

But in a sign that cash-out borrowers are seeing more financial distress right now, May's average credit score of 698 for that category was down by 7 points from April, lower by 20 points compared with February and 33 points versus May 2021.

In comparison, purchase applicant credit scores were only down 1 point from a year ago, while for rate and term borrowers, they were down 3 points.

Refinancings for any reason were just 18% of May's rate locks, the lowest share Black Knight recorded since it started tracking this data in January 2018.

Meanwhile, locks for home purchase mortgages were down 2.3% from April, but flat compared with May 2021. However, excluding the impact of home price appreciation, which drove up the balance sought in mortgage loan applications, purchase locks were down 8.5% year-over-year in May.

"Lenders are now more reliant on the purchase market for origination volumes than they have been in 20 years," Scott Happ, Optimal Blue's president, said in a press release. "Meanwhile, the trifecta of low inventory, high prices and climbing rates that has created the least affordable housing market in 16 years continues to create headwinds for precisely that segment."

Still, government loan products, more typically used by borrowers who have lower credit scores and/or are not able to make as large of a down payment, gained market share in May as Federal Housing Administration and Veterans Affairs lock activity increased at the expense of agency volumes. That trend was likely reflected in the decline seen in the average loan amount to $359,000 from $362,000, Black Knight said.

While conforming mortgages still had the largest share of the market by far, at 59%, that was down from 59.7% in April and 67.1% for May 2021.

Nonconforming mortgages, loans that do not qualify for Fannie Mae or Freddie Mac primarily because of dollar amount and/or credit, had a 16.3% share of May's rate locks, down from 17.3% in April but still above 10.6% portion of the market these had one year ago.

Rate locks for FHA-insured mortgages increased on a month-to-month basis to 14.3% from 13% in April; in May 2021, FHA loans had an 11.7% share.

At the same time, locked applications for VA-guaranteed mortgages increased in May to 9.8% from 9.3% one month prior and 9.7% during May 2021.