Do higher mortgage rates mark the end of the refi wave?

We may never again see a year like 2020. That’s somewhat somber news for the lenders who benefited from a series of downright strange conditions to generate more refi business than anyone in March could have imagined.

Both Fannie Mae and Freddie Mac reported that refis made up about 70% of their mortgage activity in 2020, and, driven by weeks upon weeks of record low mortgage rates, refis accounted for 51% of all the volume LO’s funded in Q4, soaring 158% from the same period in 2019.

However, despite a rise in overall mortgage applications over the last week, the Mortgage Bankers Association reported that refinance activity waned with rising rates. As of Monday, the average 30-year fixed refinance climbed to 3.07%, well above Freddie Mac’s PMMS low of 2.65% in January.

For many possible borrowers, the opportunity to refinance is lost before the chance even arises, while other prospective borrowers got caught in the clogged loan pipeline and didn’t get the opportunity to lock in that low rate.

“There’s a lot of floating loans out there, and those pipelines are going to get hit if rates keep on going up,” said HousingWire lead analyst Logan Mohtashami.

At the current rate, the MBA expects rates to crest 3% by the second quarter of 2021, and by 2023, forecasted rates higher than 4%. 

A one-eighth to a quarter turn in mortgage rates (high or low) can move the market substantially, Mohtashami noted. Even the 50 bps adverse market fee that some economists labeled as “unwarranted” back in December didn’t put an end to the refi wave like fluctuating rates could.

“There are people who had a 4.00% rate that refinanced to 3.25% and then said, ‘Oh well now that rates are low, I’ll refinance again to 2.75%.’ But if that rate sneaks up a quarter it’s no longer ideal and it’s lost its appeal. They are going to wait for it to come back down, right? And then it doesn’t,” Mohtashami said.

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