Mortgage originators continue to face strong headwinds

Report shows four straight months of lowered rate-lock activity, loan declines

By Tony Cantu

17 Aug 2022

Mortgage originators continue to experience strong headwinds with rate lock activity down four straight months and declines across all loan purpose types, according to the latest Originations Market Monitor prepared by Black Knight Inc.

The report looks at mortgage originations data through July month-end, leveraging daily rate lock data from the Black Knight Optimal Blue PPE.

The month’s pipeline data showed overall rate locks down 14.4% month over month, led by a 16.9% decline in rate/term refinance locks – which are now down 93.6% since last year, according to the report. Cash-out refinance activity fell another 14.1% from June -- a 67.2% year-over-year decline, the findings show. The refi share of the market held at just 18%, the lowest point on record since at least January 2018, when Optimal Blue began tracking the metric.

Moreover, government loan products gained market share as FHA lock activity increased at the expense of non-conforming loan volumes, a trend also likely reflected in another decline in the average loan amount -- from $351,000 to $344,000. The overall average credit score in July was 722, with scores on cash-out refinances edging modestly lower to 692 -- the lowest since Optimal Blue began tracking the metric in 2013.

The originations market continues to react to previous increases and continuing affordability challenges, the report found, even while 30-year interest rates pulled back slightly in July. Mortgage Professional America reached out to Andy Walden, vice president of Enterprise Research and Strategy at Black Knight, for additional insight. He agreed that housing affordability loomed large in the report’s making: “Housing affordability continues to be the primary driver of falling purchase rate locks which were down 14.3% from June and are now down 22% from the same time last year,” Walden said. “The purchase lock count, which excludes the impact of soaring home values on volume, is off 25.8% from last year and 11% from 2019, marking the first month the number of purchase locks has fallen below pre-pandemic levels. Despite interest rates coming off their June peaks, home affordability still ranks among the lowest levels seen over the past 30 years.”

Rising property values have given rise to an assortment of non-conforming products across the landscape, he noted: “While their share has pulled back in recent months, we continue to see strong demand (comparatively speaking) for non-conforming mortgages given elevated home values and attractive rates compared to conforming mortgages.”

According to the report, the average homeowner credit score on cash-out refi edged lower to 692. Walden spoke about the phenomenon: “There are a number of factors putting downward pressure on cash-out refi credit scores in recent months,” he told MPA, “including 1) the typical downward pull on refi credit scores as interest rates rise and high quality candidates exit the market, 2) high credit quality borrowers that qualify for home equity lines of credit transitioning to such second lien products allowing them to retain their low first lien interest rates, leaving lower residual credit quality borrowers taking out first lien cash-out refis and 3) potential expansion of credit to lower credit quality borrowers. Given how sharp the decline in credit scores have been in recent months, the performance of such loans warrants close observation.”

The affordability challenge isn’t likely to be mitigated anytime soon, Walden said. “Unfortunately, I expect affordability to continue to be a challenge in coming months,” the analyst said. “While the recent pull back in mortgage rates into the 5-5.25% range has moved the needle in the right direction, housing affordability still remains near multi decade lows. It will take some combination of lower interest rates (potentially in the form of shifting Fed policy), strong income growth in coming quarters/years, and/or a pullback in prices from their current levels to bring home affordability back in line with long run averages.”