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Mortgage Rate Hikes Drain Pool of ‘Refinancible’ Loans

Higher interest rates continued to shrink the population of ""refinancible"" loans in August, but they may open the door for greater home equity loan activity, ""Lender Processing Services"":http://www.lpsvcs.com/Pages/default.aspx (LPS) reported in its August Mortgage Monitor.

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According to LPS' data, the monthly prepayment rate--historically a good indicator of refinance activity--has dipped more than 30 percent in the months since May, with mortgage interest rates climbing nearly 100 basis points in that same time.

As a result of those shifts, the percentage of borrowers in loans with interest rates high enough for refinancing to make sense has dropped significantly, says Herb Blecher, SVP for the technology and analytics firm.

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""Over half of borrowers are now 'out of the money' with respect to refinancing,"" Blecher said. ""In December 2012, the population of potentially refinance-eligible borrowers stood at roughly 10 million. However, refinance activity during that time, along with rising interest rates, have shrunk that pool to just 5.7 million borrowers as of August.""

At the same time, though, rising interest rates--combined with improvements in home prices over the last year--may ""wind up contributing to a new appetite for home equity loans,"" he added.

""After bottoming out at the beginning of 2012, home prices are now at their highest levels since 2009, and borrowers who bought or refinanced within the last few years are quite likely to have accumulated additional equity in their homes,"" Blecher commented.

Based upon an analysis of historical borrowing patterns and home value trends, LPS anticipates an increase in second-lien borrowing among borrowers who locked in at low rates and who want to tap into their equity without refinancing at a higher rate.

In fact, if recent vintages follow the 2003 vintage, the number of first-lien mortgages that have a second lien on them could approach 50 percent by 2017, the company says.

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