Preparing for the refi rush

by Kimberly Greene20 Jun 2019

Although the Fed held interest rates steady in its latest rate decision, there is growing expectation that the central bank may cut rates in the latter half of 2019.

That’s great news for homeowners, as many are watching rates like a hawk and waiting for that point where it makes the most sense to refinance, generally around one percentage point. It’s also great news for originators, given the fact that many had switched their efforts to the purchase market in 2017/2018, as rates looked as if they were heading up and there was little reason for borrowers to refinance.

The implications for the potential refi rush could extend beyond the wallets and bank accounts of borrowers.

A recent report from JPMorgan MBS strategists suggests that by the end of the summer, prepayments could be about 20 percent higher than current levels. This is particularly important for mortgage traders, as the speed at which the underlying home loans will be paid off is one of the main variables that they must accurately forecast to properly value the investment of mortgage-backed security investors.

According to data from mortgage data analytics company Black Knight, there are 6.8 million borrowers who could currently benefit from a refinance, many of whom only purchased their home within the last year. It is these more recent mortgages that hold the more concentrated prepayment risk; They display many ‘red flags’ that point to borrowers responding more quickly to lower rates, such as high FICO scores and large loan sizes, Bloomberg reports.

Investors could prepare for this by using specified pools, designed to protect mortgage portfolios from a spike in refinancings. A sustained rate rally through the summer months may help those securities hold or even increase in price.

Whether a buyer is choosing to change their mortgage simply to lower their monthly payment, or do a cash out refi to renovate their home or pay off debt, refinancing can result in a significant monthly savings.

Average interest rates are around 3.82 percent nationally for 30-year fixed mortgages, after peaking near 5 percent in November.