Still, an overwhelming majority of U.S. household mortgages are either locked into a low-rate mortgage or refinance burnouts
Mortgage refinance activity is expected to pick up steam as interest rates drop in response to the broad anticipation of an upcoming federal fund rate cut as late as mid-September. And with a growing optimism that there might be multiple rate cuts by the end of 2024, mortgage interest rates may drop even further.
As of mid-August, average mortgage rates on 30-year loans dropped from their peak at mid-7% to the mid-6% range. Similarly, rates on 15-year loans fell from mid-6% levels to the mid-5% range, prompting many homeowners who borrowed at the height of interest rate hikes to look to refinancing for lower mortgage payments.
Will Mortgage Rates Go Down and Affect the Decision on When to Refinance a Mortgage?
According to the Mortgage Bankers Association, refinance applications in August 2024 have more than doubled from a year ago, which was when the Fed had just hiked the benchmark rate for the 11th time and mortgage origination activity was falling off a cliff.
As the market changes and lenders and mortgage professionals look ahead, the question remains: how many homeowners will likely find refinancing options with mid-6% or 6% mortgage rates that will provide meaningful reductions in monthly mortgage payments?
To help shed light on the question, we reviewed 15.7 million first-lien mortgages that were currently in servicing as of the end of June 2024. The example servicing portfolio consists of an outstanding balance of $3.788 trillion, representing slightly more than 30% of the total $12.52 trillion U.S. household mortgage balance reported by the Federal Reserve Bank of New York.
An Estimated 4M Active Loans Originated During the High Interest Rate Period in 2023-24
Servicing Portfolio Loan Volumes: As of June 2024, 46.2% of the loans in the servicing sample were originated before the 2020 pandemic. Twenty four percent of those loans were originated in 2013 or prior, and 22.2% of loans were originated between 2014 and 2019. These are seasoned loans that have had plenty of opportunities for a lower rate refinance, making them candidates for what is known as “refinance burnouts.” Loans in this category are unlikely to go through another refinance because of low loan balances or an already low rate.
Nearly one-in-two (46.1%) of the loans in this sample portfolio were originated between 2020 and 2022, when interest rates were at record lows. These loans are “locked-in” to their existing low to ultra-low rates.
Loans originated in 2023 and 2024 make up 7.7% of the 15.7 million servicing loans in the portfolio we analyzed. Many of these loans from those years are likely already “in the money” candidates for a lower rate refinance or will be among the first in line to apply for refinancing should interest rates drop at or below 6%.
Estimated National Total: As of June 2024, an estimated 4 million loans outstanding were originated during the period of high interest rates in 2023 and 2024. We estimate the total outstanding loan volume to be 51.97 million, with an average loan balance of $240,900.
An Estimated $1.45T Outstanding Mortgage Balances Originated During the High Interest Rate Period in 2023-2024
Servicing Portfolio Loan Balances: As of June 2024, loans originated between 2023 and 2024, during the period of high interest rates, represent 11.6% of the $3.788 trillion servicing balances. That means the remaining 88.4% of outstanding balances are either loans that have low to ultra-low interest rates or are seasoned “refinance burnout” loans with limited prospects for refinancing. Average loan sizes for the 2023 and 2024 originations cohorts are $361,000 and $371,000, respectively.
Estimated National Total: As of June 2024, an estimated $1.452 trillion outstanding mortgage balances were originated during the high interest rate period of 2023-2024.
An Estimated 2.92M Outstanding Loans Carrying an Interest Rate at or above 6.75%
Servicing Loan Volumes Breakdown by Interest Rates: An overwhelming majority of the loans in our servicing portfolio, or 88.7%, are carrying an interest rate below 6.0%, and as many as 81.7% of the loans are carrying a sub-5.25% interest rate. On the other end, 4.1% are carrying an interest rate between 6.75%-7.5% while another 1.5% of loans carrying a rate at or above 7.5%.
Estimated National Total: As of June 2024, there are an estimated 2.14 million loans with an interest rate in the 6.75%-7.5% range, while an additional 780,000 loans have a rate at or above 7.5%. In total, 2.92 million loans are carrying an interest at or above 6.75%.
An Estimated $735B in Loans May Benefit From Current Mortgage Rates or if Rates Drop Further to Near or Below 6%
Servicing Balances Breakdown by Interest Rates: Unsurprisingly, the distribution of loan balances is similar to the distribution of loan volumes where an overwhelming majority of the loans are either locked-in to a low or ultra-low low rate or are already so-called refinance burnouts, leaving the remaining 11.9% of outstanding loan balances with rates upwards of 6%.
But with the overall U.S. mortgage loan balance running in the trillions, even a small percentage of “in-the-money” loan balances can amount to hundreds of billions of dollars. Average loan sizes for those with an interest rate in 6.75-7.5% or at or above 7.5% are $265,000 and $196,000, respectively.
Estimated National Total: As of June 2024, an estimated $579 billion in loan balances are carrying an interest rate in the 6.75%-7.5% range, and an additional $157 billion in loan balances are at or above 7.5%. This results in a combined total of $735 billion in loan balances.
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