Rising rates took their toll not only on refinancing but on homebuyer demand for purchase loans in June, according to an analysis of rate lock data released Monday by Black Knight.

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Mortgage lenders saw demand for their services dwindle for the third month in a row in June, as rising rates took their toll not only on refinancing but on homebuyer demand for purchase loans, according to an analysis of rate lock data released Monday by data aggregator Black Knight.

Black Knight’s June 2022 Originations Market Monitor report showed rising rates took the biggest toll on cash-out refinancing volume, which was down 13.2 percent from May, and 54.4 percent from a year ago.

Rate/term refinancings — in which homeowners seek to lower their interest rate, rather than cash out home equity — had already been hit hard this year, but fell another 9.1 percent from May to June.

That left rate/term refinance rate lock volume down 90.4 percent from a year ago, according to daily rate lock data from Black Knight’s Optimal Blue product pricing engine.

Mortgage rate lock volumes by loan purpose

Scott Happ

“With 30-year rates hovering below 6 percent – still historically low – we’ve seen the rate/term refi market dwindle to next to nothing, with increasing downward pressure on cash-out activity,” said Optimal Blue President Scott Happ, in a statement. “Purchase volumes are driving 82 percent of all origination activity and those volumes are on the decline as well – in the heart of the traditional homebuying season.”

Purchase loan rate lock volume — a measure of the total dollar amount of rate locks — was down 10.8 percent from May, and 15.6 percent from a year ago.

But looking at purchase lock counts — which filters out the impact that rising home prices have on volume — showed purchase loan locks down 21 percent from a year ago.

While that’s still 3 percent above 2019 levels, the year-over-year drop in purchase loan demand adds weight to a forecast by Fannie Mae economists that home sales will decline this year and next.

That’s bad news for mortgage lenders, many of whom have already downsized to adjust for the new market realities. But while most Americans are worried the economy is on the wrong track, some see the tide turning in favor of homebuyers, with Fannie Mae’s latest monthly National Housing Survey showing that the share of consumers who think it’s a good time to buy ticked up in June.

Happ said he believes that “equilibrium will return,” but as of June, “the market seems to be having trouble adjusting to a rate environment anywhere above the historically low levels reached during the pandemic.”

Mortgage rates climb

According to the Optimal Blue Mortgage Market Indices (OBMMI), rates for conforming mortgages eligible for purchase by Fannie Mae and Freddie Mac have risen more dramatically over the past year than jumbo mortgages and government-backed FHA and VA loans.

  • At 5.79 percent at the end of June, rates on 30-year conforming mortgages (with loan balances of $647,200 or less) were up 2.63 percentage points from the same time a year ago.
  • Rates for 30-year jumbo mortgages (loan balances greater than $647,200) rose slightly less dramatically, climbing by 2.24 percentage points over the same period, to 5.34 percent.
  • Rates on VA loans were also a relative bargain, even after climbing 2.55 percentage points during the last year, to 5.34 percent at the end of June.
  • Rates for FHA loans have come up 2.36 percentage points in the last year, to 5.59 percent at the end of June.

Mix of business by loan product

As rates rise, government-backed FHA and VA mortgages have gained market share at the expense of conforming loans eligible for purchase by Fannie Mae and Freddie Mac. Although conforming loans still accounted for 57.2 percent of rate lock volume in June, that’s down 7.81 percentage points in the last year.

Despite a record increase in Fannie and Freddie’s 2022 baseline conforming loan limits, nonconforming mortgages including jumbo loans have boosted their market share by 4 percentage points over the last 12 months, accounting for 16.4 percent of June rate lock volume.

Cash-out refi credit scores in decline

Although lenders are eager to do more business, they’re not relaxing their underwriting standards for purchase loans and rate/term refinancings, with average borrower credit scores holding firm in the 730s over the last year.

Cash-out refinancings have been another story, with average credit scores dropping 20 points in the last three months and 35 points in the last year, to an average of 693 in June. That’s the lowest reading recorded by Optimal Blue since it began tracking the metric in 2013, and Happ said “We’ll be watching the performance of these loans closely in the months to come.”

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Email Matt Carter

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