Refinance demand slumps as higher rates weigh on mortgage activity

Elevated borrowing costs that have suppressed refinance activity since April continued to do so in August, newly released data shows, as purchase loans comprised around 4 in 5 mortgage rate locks for a fourth consecutive month.

The mortgage rate for 30-year fixed-rate loans that conform to Fannie Mae’s and Freddie Mac’s underwriting guidelines ended August at 6.72%, level with July and nearly a quarter-point higher than a year ago, said Optimal Blue in its latest mortgage market report, published Tuesday.

As a result, purchase lock volumes that declined 10% from July still remained 6% higher year over year to account for approximately 81% of total lock volumes last month. Purchase locks were down more than 12% on a three-month trended basis.

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Rate-and-term refinances declined 13% over the month and 47% from a year ago, meanwhile, while cash-out refinance volumes decreased 3% and 5%, respectively. Refinance lock share was up 40 basis points over the month, however.

“Purchase activity is still running ahead of last year,” noted Brennan O’Connell, director of data solutions at Optimal Blue, in a press release. He added that “there just isn’t much refinance demand to support the broader market.”

Overall, rate locks were 9% lower in August compared to July, slipping 3% lower than a year ago.

Total lock volumes had been 15% higher year over year in June, for example, but August’s monthly lock data shows a deepening pullback in mortgage production that began in July as mortgage rates ratcheted higher in the middle of the summer.

Refinances had comprised 44% of total mortgage production in the first quarter, according to ICE Mortgage Technology, underscoring subsequent fallout on borrowing costs and mortgage demand from the Iran war that started in late February. Optimal Blue says its rate-lock data covers one-third of the U.S. mortgage market.

Conforming lock share of Fannie Mae and Freddie Mac eligible loans declined once again in August to remain below 50% market share for the fifth consecutive month. Fannie and Freddie lock share declined to 46.9%, approximately 195 basis points lower over the past three months and 410 basis points lower than a year ago.

In contrast, nonconforming rate locks for loans that do not meet Fannie and Freddie’s or government underwriting guidelines remained just under 21% of all lock activity in August, which included more than 11% share in non-qualified mortgage (non-QM) commitments.

That’s only 1% higher non-QM share from July but 3% higher year over year.

Optimal Blue says investor and debt-service coverage ratio (DSCR) loans accounted for about 35% of non-QM production in August, up 1.7% from the previous month, while bank statement loans comprised roughly 3 in 10 non-QM locks. On a three-month basis, investor and DSCR locks were 573 basis points higher, while bank statement locks were 220 basis points lower.

Average locked loan amounts declined about 1.8% to $388,00 in August from $395,000 in July.