ICE Report reveals shift in active mortgage market toward higher interest rates
The active mortgage market is gradually shifting toward higher average rates, with a growing number of homeowners holding mortgages with rates of 5% or higher, the latest ICE Mortgage Monitor report showed.
Lower-rate mortgages have traditionally dominated the market, but this is changing, according to Andy Walden, ICE’s vice president of research and analysis.
“As of May, 24% of homeowners with mortgages now have a current interest rate of 5% or higher,” Walden said in the report. “As recently as two years ago, an astonishing nine out of every 10 mortgage holders were below that threshold.”
Walden explained that there are currently 5.8 million fewer sub-5% mortgages in the market compared to 2022. This change has been slow-moving, as borrowers with lower rates have either sold their homes or refinanced to withdraw equity.
“The entire market is acutely aware of how elevated rates have been constraining origination volumes,” he said. “But seen from another angle, the same dynamic is also serving to gradually enlarge the population of folks with high-rate mortgages, who are actively waiting for the moment a refinance makes sense. This would benefit both a growing number of homeowners and lenders.”
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The report revealed that four million first-lien mortgages originated since 2022 have 30-year rates above 6.5%, with 1.9 million having rates of 7% or higher.
On average, there are around 240,000 active mortgages in each 1/8th of a percentage point bracket in the 7-7.625% range, with a notable spike of 690,000 loans just below 7%.
“The concentration of active loans just below 7% has more to do with borrower psychology than concrete savings,” Walden said. “There’s clearly something appealing in today’s market for a homeowner to see a 6-handle in front of their mortgage rate.”
Despite the current low refinancing volumes, there have been shifts in who is refinancing. Notably, the share of VA loan refinances has increased from less than 10% of rate/term refinances a year ago to more than 30% in recent weeks, according to ICE origination data. This rise is largely due to streamlined refinances, which have allowed veterans to lower their interest rates by more than a full percentage point, resulting in average monthly savings of $230 among April originations.
The VA 30-year fixed rate mortgage index is down nearly a full percentage point from its peak in late October, making VA loans more attractive compared to FHA and conforming mortgage counterparts. VA refinances have also improved the servicing retention rate, which reached its highest level in 18 months in Q1, with retention of FHA and VA refinances tripling from 15% in Q4 to 46% in Q1.
However, these lower payments come at a cost, as borrowers often increase their loan balances to buy down rates or finance closing costs. This quick refinancing activity has led to unusually high prepayment speeds, negatively impacting investors in VA loan-backed securities.
The recent trends in VA loans align with the findings of the 2024 ICE Borrower Insights Survey, which revealed that finding the lowest mortgage rate was the top priority for borrowers when choosing a lender.
Despite this, most borrowers did not consider many options, with 84% of those surveyed considering only one (36%) or two (48%) options before selecting a lender.
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