Refinances now down by over 50% compared to a year ago

Mortgage activity fell off last week after starting off 2022 with consecutive weekly gains, as purchases decreased and refinances continued a steeper decline.

The Mortgage Bankers Association’s Market Composite Index, a measure of weekly application activity based on surveys of the organization’s members, fell a seasonally adjusted 7.1% for the weekly period ending Jan. 21. Seasonally adjusted volumes were also 39% below their levels from the same week in 2021 during a period of near record-low interest rates.

The Purchase Index dropped a seasonally adjusted 2% week over week, while on an annual basis, it fell by 10.2%. “The decline in purchase activity was led by a 5% drop in government applications, compared to a modest less-than-1% decline in conventional applications,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting, in a press release.

The Refinance Index saw an even larger dropoff, tumbling 13% from the previous week. Compared to the same seven-day period in 2021, refinances are down 53% year over year. Refinance activity dropped for the fourth week in a row, just as interest rates started taking off over the past month.

“After almost two years of lower rates, there are not many borrowers left who have an incentive to refinance,” Kan said. “Of those who are still in the market for a refinance, these higher rates are proving much less attractive to them.”

Along with the recent fall in volume, the share of refinance loans relative to overall mortgage activity also dipped to 55.8%, down from 60.3% a week earlier. But adjustable-rate loans grabbed a 4.4% share of all applications, up from 3.8%.

The precipitous decline in refinances comes as no surprise to many in the industry, including economists at Fannie Mae, who recently predicted 2022 refinances to total approximately $1.29 trillion, roughly half of last year’s volumes. The forecast came out, though, before recent run-ups in interest rates, which could lead to further dollar-volume adjustments based on where they settle, said Doug Duncan, Fannie Mae chief economist, in a recent interview with National Mortgage News.

“If they stay where they are today — when we come out with the February forecast, you'll see that refi number dropping,” Duncan said.

Federally backed applications also accounted for a smaller share of activity week over week, with Federal Housing Administration-sponsored loans falling to 8.6% of volume from 9.3% the previous period. Department of Veterans Affairs-backed mortgages edged down to 9.9% of new applications, compared to 10% the week prior, while U.S. Department of Agriculture activity increased to 0.5% from 0.4%.

“The relative weakness in government-purchase activity continues to contribute to higher loan sizes,” Kan noted, with the average purchase size jumping to another new record last week of $433,500, up 3.6% from $418,500 in the previous period. Average purchase amounts have risen significantly since starting the new year near the $400,000 mark.

The refinance loan average also climbed 2.4% to $306,700 from $299,500 a week earlier. The mean size of all new mortgage activity came in at $362,700, a 4.6% uptick from $346,800.

Interest rates increased once again across all major loan types for the second week in a row, according to the MBA survey.

The contract interest rate for 30-year fixed mortgages with conforming balances of $647,200 or less averaged 3.72%, up from 3.64% one week prior. The conforming 30-year rate has increased for five consecutive weeks and is 77 basis points higher than one year ago, Kan said.

The average contract rate for the 30-year jumbo fixed-rate mortgage for nonconforming balances also rose two basis points to 3.56% from 3.54% the previous week.

The contract interest rate average of 30-year fixed FHA-backed loans was 3.69%. Seven days earlier, the average came in at 3.64%.

Average rates climbed week over week for the 15-year fixed and adjustable mortgages as well. The contract rate for a 15-year term increased by five basis points to 3% from 2.95%, while the 5-year adjustable rate saw a larger spike, averaging 3.18% compared to 3.04% a week earlier.