New data shows where refinance incentives are growing

A lot of market conditions have improved notably for home loans and there may be more where that came from, depending on rates and location, ICE Mortgage Technology's latest monthly analysis shows.

Home affordability is at a two-year-plus high and rate drops have exposed millions to refinance incentives, with the share of median income needed for a typical home falling from 32% to 30%.

The follow-up analysis of monthly data that the Intercontinental Exchange unit released earlier gives lenders several new benchmarks, including a way to size up refinancing prospects and prepayment risks in different rate scenarios.

The analysis finds that when the average mortgage rate is in the 6.38% range, around 3.1 million borrowers would be "in the money" or have incentive to refinance, the company's McDash database shows. 

A small drop like the brief dip below 6.25% in September temporarily added incentives for an additional half million borrowers for a total of 3.6 million. If rates fell further to below 6.13%, another 1.4 million borrowers or a total of 5 million would have incentives.

But it would take a drop to 2.5% to reach the maximum amount of refinancing incentive, covering 37.3 million loans. 

The benefits of lower rates for homebuyers go furthest in places like the Midwest, where affordability has returned to levels near or at historical averages. Around a dozen of the 100 largest markets have reached that point and most of them are in that region.

Metropolitan areas that haven't benefited from a turnaround in affordability include Los Angeles, where the percentage of median income needed is 62%. San Diego, Oxnard, and San Jose, California, also are markets where affordability strains exist, as are New York and Miami.

For those refinancing, softer markets could have a downside but generally only it impairs their equity levels to a significant degree. The average loan-to-value ratio for refis inched up at 80.1%.

The rise in LTV "suggests borrowers with higher loan balances and elevated LTVs may have been first in line for relief."

Other recent numbers show negative equity share is fluctuating but still low at 2%.

How underwriting indicators show up in latest numbers

The company's earlier First Look report found foreclosure sales have sped up and other numbers have shown hints of concerns in neighboring consumer finance sectors, but the latest analysis of mortgage credit indicators shows improvement.

"While average credit score for rate-and-term refinances fell to a more than two-year low of 689 in mid-August, it climbed to 722 in the week ending Sept. 19 — a nine-month high — as borrowers with higher credit scores moved quickly," IMT said in its Mortgage Monitor report.

The credit score of rate-locked purchase mortgages topped 736, marking a six-year high in line.

The average debt-to-income ratio for a rate-locked purchase loan dipped to a two-and-a-half year low of 38.5%. The average 34.1% DTI for refinances was the lowest since March 2022. 

DTIs still haven't come back to the lower levels seen during and prior to the pandemic. Pre-pandemic, DTIs were typically no higher than 37% for purchase loans and around 33% for refis.

Sizing up potential flood risk

In a timely section of the report, given recent federal flood insurance restrictions tied to the government shutdown, IMT examined climate and property insurance data to gauge how widespread the concern is. Some of the takeaways were as follows:

• Prevalence of floods: one in every 100 years, or one-in-four chance for 30-year loans
• Mortgaged single-family homes in the United States with flood risk: 5.3 million or 12%
• Number of single-family borrowers at "high or extreme" flood risk: 350,000
• Higher risk borrowers who are under- or uninsured: 14% and around 67%, respectively

IMT defined borrowers as underinsured if they had flood coverage below the amount of their outstanding mortgage balance.