Since mortgage refinancing has fallen from its 4Q12-2Q13 peak,* the concern from our financial institution (FI) clients is that the opportunity to capitalize on home loan opportunities has passed them by. Fortunately, that’s just another recent financial myth.
Consumers will continue to need home loans regardless of interest rates, as they move, expand their families, adjust to empty nests, retire, etc. Even when mortgage interest rates were twice their current level, financial institutions flourished. Record low interest rates over recent years have spurred refinancing that otherwise might not have been as appealing to homeowners in the past, but new homes will always be a necessarily.
So while the percentage of total home loan originations has indeed shifted from mainly refinancing to new purchases, is it not true that total opportunities have dried up? Actually, with home equities in the mix, the picture actually gets rosier.
Equity is coming back and, when available, is always a good source of funds for FIs mostly because those loans are highly secured. Also, home equity loans are usually kept in portfolio rather than sold like the majority of 15+ year fixed rate mortgages, giving banks and credit unions large monetary loans to even out their balance sheets.
Datamyx, a leading provider of risk-based, data-driven marketing solutions specializing in the financial industry, compared total home loan applications from the three credit bureaus from July 2013 to June 2014 to find that despite the decline in home loan refinancing over the past year, a significantly larger percentage of consumers are actually shopping for home loans (new purchases + refinancing + home equity loans/lines) this year. An additional pleasant surprise is that the percentage of total loan shoppers who are generally home equity qualified (defined as FICO 680+ and LTV<70%) also increased this past year.
The newly installed Fed Chairperson, Janet Yellen, has shown a commitment to maintaining today’s short-term rate environment over the course of the year. Lower rates will continue to prop housing demand and ensure that the refinance market does not dry up. Mortgage Bankers Association’s Mortgage Finance Forecast projects total mortgage originations for 2015 to be 15% greater than in 2014.* Add in the contributions of increasing equity as home values continue to rebound and lenders will be met with a glut of demand and will rely on data driven marketing solutions to help target the higher quality loans for all types of home loans – refinancing, new home purchase and home equity.
* Mortgage Bankers Association, Mortgage Finance Forecast