Cash-out refis starting to slow despite equity gains

Mortgage origination activity took a major hit in February, with rate hikes squeezing out refinance activity, both for rate-term refis and cash-outs.

Overall origination activity in February was down 5.4% from January, according to the latest monthly Mortgage Monitor report from Black Knight. Purchase locks, which are not as rate-sensitive as refinancings, were up 7.2% in February over the prior month, with volumes up 5.6% from the same time last year.

But larger macroeconomic forces significantly depressed interest for refis. According to Black Knight, rate-term refi originations were down 34.1% from January and cash-out refis fell 15.3%. Overall lock activity was down 34.5%. The mix of refi volume fell to just 35%the lowest point since May of 2019, when interest rates were at a comparable level – just above 4%.

“Driven by Fed policy and exacerbated by global instability, we’ve seen the spread between 30-year conforming rates and 10-year Treasury yields climb more than 40 basis points in just three months, topping 2.25% in February,” said Scott Happ, president of Black Knight’s Optimal Blue division.

Rate-term refinance lending activity was down for the fifth consecutive month – falling to the lowest level in three years – and is down 80% from 2021 levels. Cash-out locks – which have been somewhat insulated due to strengthening home values, were down 6.3% over last year. Cash-out refis had a current value of 49 (total volume indexed to 100 in February 2018) and rate-term refis had a current value of 22, while purchase was at 132 in value in February.

The refi pull-thru fell to just 68.6%, according to Black Knight.

“While refinance activity took a hit in February due to sharp rises in conforming rates, purchase lending rose again on strong homebuyer demand,” Happ said in a statement. “The 7.2% month-over-month increase in purchase locks pushed February purchase volumes up 5.6% from the same time last year. The average home loan amount continues to climb in the face of rising home prices and tightening affordability. Indeed, February’s $6,500 jump pushed that average to just under $354,000. In turn, nonconforming products – including both jumbos and loans with expanded guidelines – accounted for a full 17% of the month’s lock activity.”

Black Knight found that rate lock volume declined the most in the San Diego-Carlsbad, CA region, down 17.6% from the month prior. That market had the highest share of refis in the country at 45%, largely on the basis that home values had accelerated so greatly. Las Vegas-Henderson, Paradise, Nevado had the highest increase in rate lock volume, at 3.7%.

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