Mortgage rate lock volume hits lowest level in 3 years

Mortgage rate lock activity was at its lowest level in over three years in October, led by consumers continuing to turn away from using cash-out refinancings to tap high home equity values, Black Knight said.

Across all loan purposes, rate locks were down 14.3% from September and 61% compared with October 2021. This is the fewest mortgages locked since February 2019, according to data analyzed from Black Knight’s Optimal Blue product and pricing engine.

In particular, cash-out refi rate locks were down 25.1% month-to-month and 83.6% year-over-year. These typically are driven more by the need for liquidity, and activity had stayed relatively consistent to 2021 levels early in the year, but volume fell off between March and April and have been trending downward ever since.

Meanwhile October’s rate-and-term refi locks were down 15.7% from September but 92.6% lower than one year prior. Overall, refinancings were just 14% of all rate locks.

“With interest rates now at their highest level in 20 years, the refi market is rapidly approaching a bottom,” said Scott Happ, president of Optimal Blue, a division of Black Knight, in a press release. “Indeed, our most recent Mortgage Monitor report showed that the number of borrowers with rate incentive to refinance has hit an all-time low of around 130,000, and the vast majority of those are at least 14 years into a 30-year mortgage, with little incentive to restart the clock.”

The decline in mortgage rates in recent days, while good news for the purchase housing market, will have limited effect on refinancings. Zillow’s mortgage rate tracker was down 55 basis points to 6.34% on Monday morning from 6.89% on Thursday, the high water mark following the release of favorable inflation data that is leading the market to mull the possibility the Federal Reserve might ease the accelerator on tightening.

The latest data on Optimal Blue’s website is for Thursday, and that found rates fell 36 basis points that day to 6.73%.

Purchase rate locks were down 12.8% from September and 38.7% from October 2021.

Meanwhile, the only product type that recorded a market share increase in October from the prior month was nonconforming mortgage. These loans were 15.8% of all loans locked during the month, up 1.78% from September and 1.99% for October 2021.

The growth in government lending share took a small step back. Federal Housing Administration-insured rate locks were 17% of activity, down 0.21% month-to-month but up 6.16% from a year prior. Veterans Affairs-guaranteed mortgages had a 10% share in October, down 0.78% from September while up 0.94% from the same month in 2021.

Conforming mortgages still make up the majority of rate locks, 56.4%, down 0.75% compared with September. But this was down 9.09% from October 2021.

Adjustable rate mortgages were 13.1% of October’s rate locks, versus 11.3% in September, as current start rates remain below those of 30-year FRMs, even though these have also increased dramatically. The 5-year Treasury-indexed hybrid ARM averaged 6.06%, versus 2.53% one year earlier, Freddie Mac reported.

“It’s therefore not very surprising to see a resurgence of somewhat lower-rate loan products like ARMs,” Happ said. “Affordability, rates and home values all factor into falling purchase prices and loan sizes and all are generating headwinds over and above the normal seasonal downturn.”

The pull-through rate for refis — the percentage of locks that actually become closed loans — was 57.3% in October, down 4.2% from September and 19.1% from one year prior.

For purchase loans, the pull-through was 75.9%, 2.9% lower from the prior month and 7.8% lower than the previous year.