Refis revive mortgage market, but trouble's brewing

Rates have dipped enough to stir refinancing and home-equity borrowing, but not enough to ease the strain on stretched homeowners. New industry data shows mortgage originations rising in the second quarter and home equity lending climbing for a fifth straight quarter, even as third-quarter delinquencies edged higher, signaling growing stress for some borrowers.

Originations climbed 8.8% on a year-over-year basis in the second quarter to 1.3 million after a 5.1% incline in the first quarter, according to the latest credit industry insights report from Transunion. Originations stayed relatively consistent with the same three months in 2024 and 2023, which both hit 1.2 million, but still remain noticeably below the 1.9 million in the second quarter of 2022.

"The housing finance landscape continues to evolve, shaped by shifting demographics and an increasingly dynamic monetary policy environment," said Satyan Merchant, senior vice president, automotive and mortgage business leader at TransUnion, in a press release Monday. "As interest rates begin to ease, mortgage activity is showing signs of recovery, supported by improving affordability conditions. We remain closely attuned to the potential for further rate reductions should the Federal Reserve proceed with additional cuts."

Mortgage rates declined for the fourth consecutive week last week following the Fed's second 25 basis-point rate cut of the year, according to Freddie Mac's Primary Mortgage Market survey released Thursday. The 30-year fixed-rate mortgage averaged 6.17%, down 0.2 percentage points from the week prior.

But Fed Chair Jerome Powell softened expectations for a December cut, which the market had previously been counting on.

"A further reduction in the policy rate at the December meeting is not a foregone conclusion — in fact, far from it," Powell said at the Federal Open Market Committee meeting last week.

The growth in originations was mainly driven by rate and term refinancing, which was up 101% year over year, as borrowers rushed to take advantage of relatively lower rates. Cash-out refinances increased 23% over the same period, the TransUnion report showed. 

Mortgage loan application volume jumped 7.1% on a seasonally-adjusted basis for the week ending Oct. 24, boosted by a 9% increase in refinance activity, according to the Mortgage Bankers Association.

The home equity market again saw annual growth, rising 14% in the second quarter. Although Gen X and Baby Boomers still hold the largest stake in home equity originations, Gen Z's share increased the most, up 28% and 23% for HELOCs and HELOANs, respectively. 

Delinquencies continue to climb

Conversely, mortgage delinquencies ticked up in the third quarter of this year. The consumer-level rate 60 days or more past due rose to 1.36% from 1.24% a year prior. Federal Housing Administration loans made up the largest share of these delinquencies, although Department of Veteran Affairs loan delinquencies increased the most, up 35% annually.

Mortgage delinquencies rose across all stages in September as well, signaling borrower pressure. 

"Rising delinquency rates — particularly within certain borrower segments — underscore the importance of maintaining a vigilant and proactive approach to risk monitoring and portfolio management," Merchant said.