ICE Mortgage Monitor: As Market Gradually Shifts to Higher Rates, Latest Data Identifies Possible Refinance Tipping Point

Rhea-AI Summary

ICE Mortgage Technology's July 2024 Mortgage Monitor Report reveals significant shifts in mortgage interest rates. As of May, 24% of mortgage holders have rates of 5% or higher, up from 10% two years ago. The report notes that 4 million loans originated since 2022 have rates above 6.5%, with 1.9 million exceeding 7%. Interestingly, there's a spike of 690K loans just below 7%, potentially indicating a tipping point for refinance activity. The VA market has seen substantial growth in refinancing, now accounting for over 30% of recent rate locks, up from less than 10% a year ago. This surge is largely due to streamline refinances, providing average monthly savings of $230 per borrower. Additionally, refinance retention hit an 18-month high in Q1, largely driven by VA and FHA loans.

Positive

• Refinance retention reached its highest level in 18 months in Q1, tripling from 15% to 46%.
• VA refinance market share grew from under 10% to over 30% of recent rate locks.
• Average monthly savings for VA refinance borrowers reached $230.

Negative

• High prepay speeds among VA loans could negatively impact investors in VA loan-backed securities.

Insights

Financial Analyst

The ICE Mortgage Monitor Report highlights a shift in the mortgage landscape, as a greater percentage of homeowners now hold mortgages with rates of 5% or higher. This is a significant uptick from the past two years. The data suggests that about $4 million loans originated since 2022 have interest rates above 6.5%, with $1.9 million exceeding 7%. This shift in rates could provide a modest window for refinancing opportunities as rates begin to ease.

From a financial standpoint, investors should monitor the potential rise in refinance activity, which could be indicative of improved lending volumes for banks and lending institutions. With the average VA refinance borrower saving around $230 per month, we can anticipate an increase in consumer spending, potentially stimulating economic activity. However, it's important to consider the costs associated with these refinances, as many borrowers have increased their loan balances to buy down rates or finance closing costs.

The shift to higher-rate mortgages opens an avenue for lenders to tap into the growing market of homeowners with higher rates looking to refinance. Nevertheless, the overall refinance volume remains a fraction of historical levels, tempering short-term gains. In contrast, the long-term outlook may see incremental benefits as more homeowners become eligible for refinancing.

For retail investors, this trend could signal opportunities in the mortgage-backed securities market, albeit with caution. The recent spike in prepayment speeds among VA loans could negatively impact these securities, making it important to weigh the benefits against potential risks.

Market Research Analyst

The report also highlights the increasing share of VA loan refinances, which now account for more than 30% of recent rate locks, a notable rise from less than 10% last year. This spike is attributed to streamlined refinancing programs that appeal to veterans looking to reduce their mortgage rates significantly. The streamlined nature of these loans, coupled with the lower rates available for VA loans compared to FHA or conventional loans, results in significant monthly savings for borrowers.

From a market research perspective, this trend underscores the importance of targeted products that address specific borrower needs. Lenders who effectively market and offer streamlined refinance programs could see increased retention rates and borrower satisfaction. However, it's important to be cognizant of the higher prepayment speeds, which can have a negative impact on investors in VA loan-backed securities.

For retail investors, understanding these dynamics can help identify lending institutions with strong VA and FHA loan portfolios. These companies may stand to benefit from increased refinance activity and improved borrower retention rates. The critical factor remains how well these lenders can manage the balance between offering attractive refinance terms and mitigating the risks associated with high prepayment speeds.

Mortgage Advisor

The data also reveals a psychological element in borrower behavior; a noticeable cluster of loans sits just below the 7% threshold, as homeowners seem to prefer a mortgage rate that starts with a 6. This preference indicates that even small rate reductions can potentially trigger refinancing activity. Lenders should pay close attention to these psychological factors when designing and marketing refinancing products.

This behavior can be leveraged by lenders to create tailored, psychologically appealing loan products that cater to this subset of borrowers. By offering slightly lower rates than the market average, lenders can attract more refinance applications, thus increasing their loan portfolios.

For investors, recognizing these psychological triggers can be beneficial when evaluating the potential performance of mortgage lenders. Companies that successfully tap into borrower psychology and offer competitive rates may see higher refinance volumes, leading to improved financial performance in the short to medium term.

However, it's important to remain cautious of the broader economic impacts, such as potential increases in loan balances and the associated risks. A balanced approach, considering both borrower psychology and financial health, will be key to navigating this evolving mortgage landscape.

• According to ICE Mortgage Technology data and analytics, as of May, 24% of mortgage holders had current interest rates of 5% or higher, up from 10% two years ago
• Four million loans originated since 2022 have rates of 6.5% or higher – 1.9M at 7%+ – providing modest opportunity for growth in the number of mortgage holders with incentive to refinance as rates ease
• An average of ~240K mortgages sit in each 1/8th of a percent rate band from 7-7.625% providing only modest increases to the number of in-the-money mortgages as those loans gain refinance incentive
• There’s a spike of 690K loans with rates just below 7%, driven in part by borrowers buying down their rates for the comfort of an interest rate that starts with a 6, which could be a tipping point to more meaningful, albeit still modest, refi activity as those borrowers gain incentive to refinance
• The VA share of rate/term refi activity experienced a noticeable upswing in recent weeks, accounting for more than 30% of recent rate locks, according to ICE originations data, up from less than 10% last year
• The average VA refinance borrower is early into their 30-year term (average prior loan age of ~1 year) and benefitting from a 1pp cut in their first lien mortgage rate, for an average savings of $230 per month
• Refinance retention hit its highest level in 18 months in Q1, driven in part by a tripling of rate/term retention – from 15% in Q4 to 46% in Q1 – among borrowers refinancing their VA and FHA loans

ATLANTA & NEW YORK--(BUSINESS WIRE)-- Intercontinental Exchange, Inc. (NYSE:ICE), a leading global provider of technology and data, today released its July 2024 ICE Mortgage Monitor Report, based on the company’s industry-leading mortgage, real estate and public records data sets.

This month’s Mortgage Monitor looks into the dynamics behind the changing makeup of the active mortgage market, which is gradually shifting toward higher average rates. As Andy Walden, ICE’s Vice President of Research and Analysis notes, the overall market remains heavily skewed toward lower-rate mortgages, but that is changing.

“As of May, 24% of homeowners with mortgages now have a current interest rate of 5% or higher,” said Walden. “As recently as two years ago an astonishing nine of every 10 mortgage holders were below that threshold.

“All in, there are 5.8M fewer sub-5% mortgages in the market today than there were at this time in 2022. This has been a slow-moving change, as borrowers with lower rates have sold their homes or, to a smaller degree, refinanced to withdraw equity. The entire market is acutely aware of how elevated rates have been constraining origination volumes. But seen from another angle, the same dynamic is also serving to gradually enlarge the population of folks with high-rate mortgages, who are actively waiting for the moment a refinance makes sense. This would benefit both a growing number of homeowners and lenders.”

As noted in the report, 4M first lien mortgages originated since 2022 have 30-year rates above 6.5%, with 1.9M having rates of 7% or higher. On average, there are ~240K active mortgages in each 1/8th of a percentage point bracket in the 7-7.625% range; however, there’s a noticeable spike of 690K loans with rates just below 7%. Walden explains:

“The concentration of active loans just below 7% has more to do with borrower psychology than concrete savings. There’s clearly something appealing in today’s market for a homeowner to see a 6-handle in front of their mortgage rate. From a rate/term refinance lending perspective, this group is worth watching as they represent a potential tipping point for a return to more meaningful, albeit historically modest, refi volumes.”

For now, refi volumes remain at a fraction of historical levels. That said, we have seen some notable shifts in who is taking out refis in today’s market. Consider, for example, the recent rise in VA market share, from less than 10% of rate/term refis a year ago to more than 30% in recent weeks, according to ICE origination data.

The rise in VA refinance share seems to be due, in large part, to streamline refinances. Some veterans, especially those who had taken out mortgages within the past year, availed themselves of the streamlined refinancing program to lower their interest rate by more than a full percentage point, for an average savings of $230 per month among April originations, according to a before-and-after analysis of ICE McDash +Property data.

That makes sense, considering the ICE U.S. VA 30-Year fixed rate mortgage index is down nearly a full percentage point from its peak in late October, with the average rate offering among such loans notably below that of FHA and conforming mortgage counterparts. VA refinances also helped improve the servicing retention rate in Q1 to its highest level in 18 months, with retention of FHA and VA refinances tripling from 15% in Q4 to 46% in Q1.

Those lower payments come at a cost, however, as the average borrower increased their loan balance to buy down their rate and/or finance closing costs. The quick turn also resulted in unusually high prepay speeds, which can negatively impact investors in VA loan backed securities.

The recent activity among VA loans supports the findings of the recently released 2024 ICE Borrower Insights Survey, which showed that finding the lowest mortgage rate trumped all other concerns when choosing a lender, with a 20-point delta between that and the next most frequent choice. But, while borrowers want the lowest rate, they typically don’t consider many options.

In fact, 84% of borrowers surveyed considered only one (36%) or two (48%) options before selecting a lender. This, as well as the successful proactive retention of FHA/VA borrowers in Q1, shows how important it is for lenders to stay attuned to their borrowers’ needs and make first contact when a beneficial refi opportunity arises.

Much more information on these and other topics can be found in this month’s Mortgage Monitor.

About Mortgage Monitor

ICE manages the nation’s leading repository of loan-level residential mortgage data and performance information covering the majority of the overall market, including tens of millions of loans across the spectrum of credit products and more than 160 million historical records. The combined insight of the ICE Home Price Index and Collateral Analytics’ home price and real estate data provides one of the most complete, accurate and timely measures of home prices available, covering 95% of U.S. residential properties down to the ZIP-code level. In addition, the company maintains one of the most robust public property records databases available, covering 99.9% of the U.S. population and households from more than 3,100 counties.

ICE’s research experts carefully analyze this data to produce a summary supplemented by dozens of charts and graphs that reflect trend and point-in-time observations for the monthly Mortgage Monitor Report. To review the full report, visit: https://www.icemortgagetechnology.com/resources/data-reports

About Intercontinental Exchange

Intercontinental Exchange, Inc. (NYSE: ICE) is a Fortune 500 company that designs, builds, and operates digital networks that connect people to opportunity. We provide financial technology and data services across major asset classes helping our customers access mission-critical workflow tools that increase transparency and efficiency. ICE’s futures, equity, and options exchanges -- including the New York Stock Exchange -- and clearing houses help people invest, raise capital and manage risk. We offer some of the world’s largest markets to trade and clear energy and environmental products. Our fixed income, data services and execution capabilities provide information, analytics and platforms that help our customers streamline processes and capitalize on opportunities. At ICE Mortgage Technology, we are transforming U.S. housing finance, from initial consumer engagement through loan production, closing, registration and the long-term servicing relationship. Together, ICE transforms, streamlines, and automates industries to connect our customers to opportunity.

Trademarks of ICE and/or its affiliates include Intercontinental Exchange, ICE, ICE block design, NYSE and New York Stock Exchange. Information regarding additional trademarks and intellectual property rights of Intercontinental Exchange, Inc. and/or its affiliates is located here. Key Information Documents for certain products covered by the EU Packaged Retail and Insurance-based Investment Products Regulation can be accessed on the relevant exchange website under the heading “Key Information Documents (KIDS).”

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 -- Statements in this press release regarding ICE's business that are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see ICE's Securities and Exchange Commission (SEC) filings, including, but not limited to, the risk factors in ICE's Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on February 8, 2024.

Source: Intercontinental Exchange

Category: Mortgage Technology

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Source: Intercontinental Exchange

FAQ

What percentage of mortgage holders have interest rates of 5% or higher as of May 2024?

As of May 2024, 24% of mortgage holders had interest rates of 5% or higher.

How many loans originated since 2022 have interest rates above 6.5%?

4 million loans originated since 2022 have interest rates above 6.5%.

What is the current VA refinance market share according to ICE?

The VA refinance market share currently accounts for over 30% of recent rate locks.

How much do VA refinance borrowers save on average per month?

VA refinance borrowers save an average of $230 per month.

What is the impact of high prepay speeds on investors in VA loan-backed securities?

High prepay speeds can negatively impact investors in VA loan-backed securities.