Would-be homebuyers rushed to lock in mortgage rates in March

Demand for purchase loans climbed dramatically in March as the spring homebuying season got underway and would-be homebuyers rushed to lock in rates, according to data released Monday by Black Knight.

Part of the jump in purchase loan demand is seasonal, with rate locks up 69 percent over the last three months. But Black Knight data shows purchase loan rate locks are up 4.3 percent from a year ago — an encouraging sign given the dramatic runup in mortgage rates in March.

Scott Happ, president of Black Knight’s Optimal Blue division, noted that rates on 30-year fixed-rate mortgages climbed seven-tenths of a percentage point in March, to 4.79 percent.

“Despite seeing the fastest one-month rise in rates in nearly 13 years, we saw purchase lock volumes increase by 31 percent from February — likely as prospective buyers moved to lock in their loans before rates climbed any higher,” Happ said in a statement.

That’s good news, considering that only 24 percent of consumers surveyed by Fannie Mae in March said it was a good time to buy a home — the lowest reading ever in records dating to 2010.

Plunging demand for ‘rate-and-term’ refinancing

Source: Black Knight Originations Market Monitor.

Black Knight’s monthly Originations Market Monitor report showed rising mortgage rates have had a dramatic impact on demand for refinancing — particularly “rate-and-term” refinances, where borrowers are trying to get a better rate rather than cash out some of their home equity.

Demand for rate-and-term refinancing was down 81 percent in March from a year ago, while cash-out rate locks fell by a more modest 8.1 percent. Cash-out rate locks actually increased by 1.6 percent from February to March — which could reflect the fact that rising home prices make it easier to cash out equity, and cash-out borrowers often use their loan proceeds to pay off high-interest debt.

Pull-through rates for refinancing decline

Source: Black Knight Originations Market Monitor.

Not every applicant who locks in a rate follows through and takes out a loan, and “pull-through rates” on refinancing applications have dropped sharply from a year ago, with only 65.7 percent of rate locks becoming funded loans.

While the pull-through rate on purchase loans has not deteriorated as dramatically, it remains below pre-pandemic levels, at 78.2 percent.

Rising demand for nonconforming loans

Source: Black Knight Originations Market Monitor.

The dramatic runup in home prices means that a larger share of borrowers are seeking “nonconforming” loans that are too big to be purchased by Fannie Mae or Freddie Mac, or don’t meet their underwriting standards.

While conforming loans eligible for purchase by Fannie and Freddie accounted for 60.9 percent of March rate locks, that’s down from 67.8 percent a year ago.

Fannie and Freddie’s baseline conforming loan limit has been increased this year to $647,200, and the mortgage giants can buy loans of nearly $1 million in some high-cost markets. Nevertheless, more borrowers are seeking “jumbo loans” that exceed Fannie and Freddie’s limits.

“As home prices continue to climb — even in the face of sharply rising interest rates — we’ve seen the average loan amount rise as well,” to $362,000 in March, Happ said. “In turn, nonconforming products — including both jumbos and loans with expanded guidelines – continued to take market share from conforming loans and accounted for a full 18 percent of the month’s lock activity.”

FHA market share is also up, accounting for 11.7 percent of March rate locks, up from 10.9 percent a year ago. Demand for VA and USDA loans has slipped slightly, with the share of rate locks dropping by less than 1 percentage point from a year ago.

Growing ‘spread’ between government bond yields and mortgage rates

Source: Black Knight Originations Market Monitor.

One issue that’s helping push mortgage rates up is that investors who buy mortgage-backed securities (MBS) are starting to see them as more risky relative to 10-year Treasury notes.

The “spread” between mortgage rates and 10-year Treasurys has grown from 1.6 percentage points a year ago to 2.47 percentage points in March, as MBS investors demand higher yields.

That 87-basis point difference means homebuyers are paying interest rates that are nearly a full percentage point higher than they would be if the spread between government bonds and mortgage-backed securities hadn’t widened.

Both 10-year Treasury yields and mortgage rates continue to rise, with rates on 30-year fixed rate mortgages breaking through the 5 percent threshold last week.

Credit scores dropping for cash-out refis

Source: Black Knight Originations Market Monitor.

While average credit scores for borrowers looking to refinance have fallen dramatically in the last year, homeowners locking in rates for purchase loans have remained stable.

At 734, the average credit score for borrowers locking rates on purchase loans is actually up from 730 three months ago, as rising rates make it costlier for those with less than perfect credit to finance home purchases.

The average credit score for borrowers not seeking to take cash out when refinancing their existing mortgage has dropped to 729, down nine points from 738 a year ago. But the average credit score for borrowers seeking to take cash out when refinancing has dropped even more precipitously, to 713, down 24 points from 737 a year ago.

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Email Matt Carter