New data from Black Knight shows drop in rate locks for purchase loans and refinancing.

Demand for mortgages sagged in April to the lowest level in almost a year, despite the fact that rates eased somewhat and remained near historic lows.

That’s according to a new report from data and analytics firm Black Knight, which shows a major shift in the mortgage industry continues as lenders get more and more of their business from originating purchase loans and less from refinancing.

Black Knight’s Originations Market Monitor shows purchase loans accounted for 55 percent of mortgage originations last month, up from 52 percent in March.

March was a significant milestone in that it marked the first time since December, 2019 that lenders originated more purchase loans than refinancings.

Although that might sound like good news for real estate brokers and agents, the new data from Black Knight shows demand for both purchase mortgages and refinancing fell during April. But because refinancing took a bigger hit, purchase loans picked up additional market share.

Trends in mortgage originations, April 2021

Source: Black Knight Originations Market Monitor

Rate locks for purchase mortgages fell by 6 percent from March to April, Black Knight reported. But cash-out refinancings were down 13 percent over the same period, and rate-and-term refinancings plummeted 20 percent.

Looking back a year, purchase loan originations were up 114 percent. But that’s largely because April 2020 was a dismal month for home sales, with the pandemic got underway in earnest.

Across all loan types, rate locks were down 11.3 percent from March to April, bringing mortgage originations to the lowest levels seen since May 2020, Black Knight reported.

As demand falls, lenders are reacting by extending credit to borrowers with lower credit scores, and putting more customers into FHA, VA and USDA loans, said Scott Happ, president of Black Knight Secondary Marketing Technologies.

Scott Happ

“As volume has tightened, we’ve seen average credit scores decline across all products and purposes, and conventional loans lose share to government-backed mortgages,” Happ said in a statement. “Neither are unexpected developments given that, when rates begin to rise, higher-credit borrowers tend to simply not engage.”

But that doesn’t bode well for the future, since rates are still not far off historical lows. Black Knight estimates there are 14.5 million qualified homeowners who could still benefit by refinancing at a lower rate.

“It will be interesting – and telling – to see both how rates move in the coming weeks, and whether or not we see refi volumes increase as a result,” Happ said.

Realtors will be watching rates closely as well. With listings in short supply, rising prices in many markets have created affordability challenges for buyers, which rising rates could exacerbate.

Whether rates surge or not in the months ahead depends largely on whether wages and consumer prices rise sharply and trigger worries about inflation at the Federal Reserve. Most forecasters expect at least a modest rise in mortgage rates.

In an April 12 forecast, economists at Fannie Mae said they expect rates on 30-year fixed-rate mortgages to hit 3.4 percent by the end of the year, and average 3.6 percent in 2022, up from 3.1 percent last year.

That would put rates back about where they were before the pandemic, when quick action by the Fed and a flight to safety by investors into bonds and mortgage-backed securities brought mortgage rates below 3 percent.

Nevertheless, Fannie Mae economists see home sales falling by 5.3 percent next year, to 6.49 million, as homes remain scarce and builders struggle to keep up with demand.

Lawrence Yun, chief economist for the National Association of Realtors, agrees that the national housing market may be topping out due to inventory shortages.

Lawrence Yun | Photo credit: NAR

“The cumulative effect of 14 years of under-production is we simply don’t have enough homes for sale,” Yun said at the trade group’s midyear conference.

He’d like to see the government looking at opportunity zones, tax credits, infrastructure spending dedicated to housing, and tax relief for investor sales.

“Whatever it is, we need to bring more inventory because you can see that we will not fix this housing shortage in a simple one-year time frame,” Yun said.

Email Matt Carter

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