As Purchase Share Grows, So Does Delinquency Risk

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The refinance share of mortgage volume fell to 36% of all loans in the third quarter, making 2018 the most purchase-dominant market in 18 years, Black Knight says.

That’s a concern, as refinances have tended to significantly outperform purchase originations in recent years.

“When we take a look back and apply today’s blend of originations to prior vintages, the impact becomes clear,” says Ben Graboske, executive vice president of Black Knight’s data and analytics division, in the firm’s Mortgage Monitor report. “A market blend matching today’s would have resulted in an increase in the number of non-current mortgages by anywhere from two percent in 2017 to more than a 30 percent rise in 2012, when refinances made up more than 70 percent of all lending.”

Graboske says the firm will be monitoring to see if increasing purchase share impacts mortgage performance moving forward.

Meanwhile, the dip in mortgage rates in December helped boost the “refinanceable” population – which is the number of homeowners who could likely qualify for and see at least a 0.75% interest rate reduction by refinancing – by about 550,000 homeowners, according to the report.

However, the refinanceable population is down significantly from a year ago. The rise in rates during the past 12 months means about 2.4 million fewer homeowners would qualify for – or benefit from – a refinance.

“As recently as last month, the size of the refinanceable population fell to a 10-year low as interest rates hit multi-year highs,” explains Ben Graboske, executive vice president of Black Knight’s data and analytics division, in the report. “Rates have since pulled back, with the 30-year fixed rate falling to 4.55 percent as of the end of December. As a result, some 550,000 homeowners with mortgages who would not benefit from refinancing have now seen their interest rate incentive to refinance return.”

Graboske adds that the 29% month-over-month increase in the refinanceable population “may provide some solace to a refinance market still reeling from multiple quarters of historically low – and declining – volumes.”

Black Knight’s data shows that the U.S. mortgage delinquency rate stood at about 3.71% as of the end of November, an increase of 1.76% compared with October but down 18.53% compared with November 2017.

There were about 45,000 foreclosure starts in November – down 10.67% compared with October and down 5.44% compared with November 2017, the firm’s data shows.

The monthly prepayment rate was 0.66%, down 14.95% compared with the previous month and down 33.00% compared with a year earlier to reach the lowest level since November 2008.

Black Knight notes that historically, prepayments were driven primarily by refinance activity but, more recently, the primary driver has become housing sales.

The last time the prepayment rate was this low – in the heat of the financial crisis – interest rates were above 6% and purchase lending had fallen by more than 50% in a 24-month span.

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