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The Ever-Shrinking Pool of Refinance Candidates

The data shows that the mortgage rates of most current homeowners are low enough to where refinancing would not make financial sense.  But what about those homeowners with higher mortgage rates?

Many of those high-interest rate borrowers may not have an incentive to refinance their mortgages either, according to CoreLogic’s September 2016 MarketPulse released Wednesday.

As of May 2016, approximately 41 percent of residential mortgages representing 31 percent of outstanding unpaid principal balance (UPB) had mortgage rates of greater than 4.38 percent, which is approximately 100 basis points higher than the average 30-year fixed-rate mortgage has been for the last few months, according to CoreLogic. That 41 percent breaks down to 18 percent with rates between 4.38 and 5 percent and 23 percent with rates higher than 5 percent.

The serious delinquency rate (90 days or more overdue or in foreclosure) tends to be higher for homeowners with higher interest rates. The average serious delinquency rate nationwide for all mortgages is 2.9 percent, according to the latest CoreLogic National Foreclosure Report; for mortgages with rates between 5 and 6, the serious delinquency rate jumps to 4 percent; for mortgages with rates between 6 and 7 percent, the serious delinquency rate jumps up to about 7 percent; and approximately 12 percent of mortgages with rates higher than 7 percent are in serious delinquency (four times the national average).

“This explains why a portion of these borrowers haven’t refinanced,” CoreLogic Principal Economist Molly Boesel said. “They are behind on their payments and most likely wouldn’t be able to qualify for a new mortgage.”

The number of “in the money” borrowers for whom refinancing would make sense shrinks even further when credit score is figured in. When a borrower’s mortgage becomes 30 days or more past due, it adversely affects that borrower’s credit. And the share of mortgages that has ever been 30 days or more past due, or the “ever-30” rate, also climbs higher along with higher mortgage rates. Approximately half of mortgages with rates of 7 percent or higher have been 30 or more days delinquent at some point.

When ever-30 borrowers and loans held in private securities (not owned by the government and therefore are not eligible for FHFA’s Home Affordable Refinance Program) are removed from the pool, the share of “in the money” borrowers with rates higher than 5 percent shrinks to 13 percent (representing only 7 percent of UPB).

Further reducing the incentive for high-interest rate borrowers to refinance is the comparatively low UPB for those borrowers. CoreLogic’s data shows that the average UPB on loans got lower as rates climbed. Mortgage loans with rates of up to 5 percent averaged close to $200,000 in UPB; by comparison, those loans with rates of 7 percent or higher had an average of approximately $53,000 in UPB.

“Without considering credit impairments or investor type, we found a large share of mortgages that appeared to be ripe for refinancing, with 23 percent of outstanding first mortgages having rates above 5 percent,” Boesel said. “Once removing loans that are seriously delinquent, have ever ben delinquent, or are in private mortgage pools, the share of mortgages above 5 percent fell to 13 percent. Of this remaining group, average loan balances tended to be small, indicating that while mortgage rates are near historic lows, there may not be many borrowers left who have the incentive or are eligible to refinance.”

Borrowers with mortgages owned by Fannie Mae or Freddie Mac may still have an incentive to refinance. The Federal Housing Finance Agency estimated in its Q2 Refinance Report that there are still more than 323,000 U.S. borrowers  eligible for HARP who have a financial incentive to refinance, as of the first quarter of 2016. FHFA said these borrowers meet the basic HARP eligibility requirements: have a remaining balance of $50,000 or more on their mortgage, have a remaining term on their loan of greater than 10 years, and their mortgage interest rate is at least 1.5 percent higher than current market rates.”

Click here to view the entire CoreLogic September 2016 MarketPulse.

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.
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