Refis up last week, but muted compared with boom: Fannie Mae

Mortgage refinance applications increased nearly 18% by dollar volume and 16% by units from the previous week for the seven days ended June 10, but they were down almost 70% and 69% respectively from 2021, a new Fannie Mae index found.

The Refinance Application Level Index pulls data from Fannie Mae’s Desktop Underwriter, with the goal of providing lenders and mortgage-backed securities investors with insight into prepayment trends.

“Forecasting refinance originations and prepayments has become more challenging in the past two years, as the observed relationship between refinance incentive and prepayments has evolved,” Devang Doshi, senior vice president, capital markets — single-family products, said in a press release. “The RALI has been a strong leading indicator for prepayment activities, and we believe the additional transparency it brings industry participants will improve prepayment modeling performance.”

Mortgage-backed securities investors, both in agency and nonagency paper, have prepayment risk if the loans pay off too quickly, or if they stay on the books longer than modeled, as a recent paper from Standard & Poor’s on non-qualified mortgage deals noted.

The RALI comes in two versions, one a dollar volume measure of unpaid principal balance and the other based on loan count. They are indexed at 100 for the week ended Jan. 9, 2004, with weekly movements proportional to that base level and are not seasonally adjusted. Fannie Mae will release the RALI weekly on Tuesdays at 10 a.m.

Both versions of RALI peaked during the week of March 6, 2020, at 1451.2 for RALI dollar volume and 800 for loan count is 800.

This week’s RALI dollar volume was 226.9, compared with 192.5 for the week ended June 3, a period which included Memorial Day. For this week last year, the dollar volume was 743.2.

Meanwhile the June 10 loan count was 137, versus 119.4 for the previous week and last year’s 442.

“The dollar volume of refinance application rebounded from the Memorial Day holiday-driven contraction this past week, and the dollar volume was essentially the same as the week prior to the holiday weekend,” Fannie Mae Chief Economist Doug Duncan said in a blog post. “The dollar volume has fallen significantly this year as we’ve moved into a higher mortgage rate environment, but it remains approximately 50% above the average level in the fourth quarter of 2018, the most recent trough in the refinance market.”

It is highly unlikely that next week’s RALI will again report an increase in refinance activity as the 30-year fixed-rate mortgage spiked above 6% on June 14 before settling down later that day to 5,77%, according to Zillow.

On the other hand, homeowners hold $11 trillion in tappable home equity, according to Black Knight, which they can turn to in case of a personal liquidity crunch through a cash-out refinance.

This could already be happening, as the average credit score for consumers that locked-in the rate on a cash-out refi in May fell to 698 from 705 for April and 731 during May 2021, a separate Black Knight report said.