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Thursday, September 22, 2011

Fed Study: Lack of Home equity and underwriting changes limited Refinancing in 2010

by Calculated Risk on 9/22/2011 08:19:00 PM

Here is a new study released today of mortgage originations in 2010. From the Federal Reserve: The Mortgage Market in 2010: Highlights from the Data Reported under the Home Mortgage Disclosure Act

Back in 2003, about 35.5% of all homeowners refinanced. In 2010 only 10.7% of homeowners refinanced. On page 62, the study provides a table by FICO score, year of origination, and states with steep house price declines compared to all other states ("Steepest declines" consists of the five states with the steepest declines in house prices from 2006 to 2009: Arizona, California, Florida, Michigan, and Nevada; "other" consists of all remaining states.) Only a few borrowers with low FICO scores refinanced in 2010, and the rates for refinancing were lower in the five states than in the other states.

This is important - although we may see sub 4% conforming 30 year fixed rate mortgages soon, many borrowers will not be able to refinance.

I've excerpted a few key findings with highlights.

• Mortgage originations declined between 2009 and 2010 in the HMDA data from just under 9 million loans to fewer than 8 million loans. Most significant was the decline in the number of refinance loans despite historically low baseline mortgage interest rates throughout the year. Home-purchase loans also declined, but less so than the decline in refinance lending.

• We draw on data from a national credit bureau to highlight the importance of house price declines and changes in underwriting relative to earlier in the decade for refinance activity during 2010. We estimate that, in the absence of home equity problems and underwriting changes, roughly 2.3 million first-lien owner-occupant refinance loans would have been made during 2010 on top of the 4.5 million such loans that were actually originated.

A sharp drop in home-purchase lending activity occurred in the middle of 2010, right alongside the June closing deadline (although the deadline was retroactively extended to September). The ending of this program during 2010 may help explain the decline in the incidence of home-purchase lending to lower-income borrowers between the first and second halves of the year.

Home-purchase lending in highly distressed census tracts identified by the Neighborhood Stabilization Program (NSP) was 75 percent lower in 2010 than it had been in these same tracts in 2005. This decline was notably larger than that experienced in other tracts, and appears to primarily reflect a much sharper decrease in lending to higher-income borrowers in the highly distressed neighborhoods.

National single-family home loan limits on both FHA loans and Freddie Mac and Fannie Mae purchases are scheduled to fall on October 1, 2011. Analysis of the 2010 HMDA data suggests that the number of loans affected by these limit changes is likely to be small. For example, about 1.3 percent of both the 2010 home-purchase and refinance loans fell into a size range affected by the proposed limit changes for Freddie Mac and Fannie Mae. Although the affected number of loans is small relative to the total number of loans, the analysis also shows that the number is large relative to the current jumbo loan market. How easily the private market would be able to absorb this potentially large increase in the market for jumbo loans is unclear.