Fewer homeowners constrained by mortgage lock-in effect

Two years ago, nine out of 10 mortgages had rates below 5 percent. Today, there are 5.8 million fewer sub-5 percent mortgages in the market and 1 in 4 borrowers has a higher rate.

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The number of homeowners feeling constrained by the mortgage lock-in effect is gradually diminishing, with one in four homeowners who don’t own their homes outright now paying interest rates of 5 percent or more on their mortgage.

The trend that’s emerged over the last two years is a slow-moving one, according to data released Monday by Intercontinental Exchange Inc. (ICE). However, the data has positive implications for both real estate agents and lenders, who saw home sales and refinancings shrink dramatically after the Federal Reserve began raising interest rates to fight inflation in 2022.

“All in, there are 5.8 million fewer sub-5 percent mortgages in the market today than there were at this time in 2022,” ICE’s Andy Walden said, in a statement. “This has been a slow-moving change, as borrowers with lower rates have sold their homes or, to a smaller degree, refinanced to withdraw equity.”

Two years ago, 9 out of 10 mortgages had rates below 5 percent, after homeowners rushed to refinance their loans at rock-bottom rates during the pandemic. Many of those homeowners might be inclined to sell, but are feeling locked in to their existing home because they don’t want to take out a new mortgage at a higher rate.

Andy Walden

Andy Walden

“The entire market is acutely aware of how elevated rates have been constraining origination volumes,” Walden 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.”

One in four mortgages carries a rate above 5 percent


Mortgage rate distribution ICE Mortgage Monitor July 2024

Source: ICE Mortgage Monitor, July 2024.

About 4 million mortgages originated since 2022 have rates above 6.5 percent, including 1.9 million with rates of 7 percent or higher, according to the July 2024 ICE Mortgage Monitor Report. ICE’s data shows that as of May, 24 percent of mortgages carried rates above 5 percent.

For real estate agents looking to scare up listings, homeowners who have cashed out equity by refinancing at a higher interest rate could be good prospects. About two-thirds of mortgage refis continue to be cash-out requests, ICE noted.

For mortgage lenders, recent homebuyers may be eager to refinance if rates continue to descend from peaks seen in October 2023. “Rate and term” refinancings aimed at securing a lower rate have been on the rise in recent weeks, and now account for one-third of refi applications.

Loan servicers who collect homeowners’ monthly mortgage payments are in a good position to capture this refinancing business, retaining close to half of recently originated mortgages when borrowers refinanced.

Lenders retain more recently originated mortgages

Refi distribution ICE Mortgage Monitor July 2024

Source: ICE Mortgage Monitor, July 2024.

While some lenders sell their mortgage servicing rights to companies that specialize in collecting payments, big lenders like Rocket Mortgage and UWM often like to service their own loans so they can improve their chances of providing the borrower’s next mortgage.

During the first quarter of 2024, lenders were able to retain 29 percent of the borrowers who refinanced at lower rates, and 22 percent of borrowers seeking cash-out refis. But the retention rate on newer mortgages was much higher — 47 percent for loans originated in 2023, and 41 percent for 2022 vintage loans.

ICE estimates there are about 4 million mortgages originated from 2022 through today with rates at or above 6.5 percent, and that “It will be important for lenders and servicers to remain engaged with these borrowers so that they can be ready with a competitive offering when the opportunity arises.”

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