The second quarter was a banner period for the mortgage industry, posting the largest quarterly origination volume on record, according to the latest data from Black Knight.
The nearly $1.1 trillion in first lien mortgages is the highest seen in a quarter since Black Knight began keeping track of the metric in January 2000. With interest rates plummeting to all-time lows between April and June, the historic origination volume was driven by a frenzy of refinance activity, with refi lending up more than 60% from the first quarter and over 200% from the same quarter last year.
The rate-propelled flurry pushed refi activity into accounting for almost 70% of all second quarter originations by dollar value. Meanwhile, restrictions related to the COVID-19 pandemic negatively impacted the typical spring homebuying season, leading purchase lending to fall 8% year over year in the second quarter — although according to Black Knight Data & Analytics President Ben Graboske, mortgage rate lock data suggests that the busy season was simply delayed into the third quarter.
“Purchase locks in Q3 2020 have already made up for the losses of a COVID-impacted Q2 – and then some – based upon normal seasonal expectations,” Graboske said. “In fact, rate locks are suggesting that we could see Q3 purchase lending break typical seasonal trends and rise by 30 to 40%, which would push us to a new record high.”
Consider this: After purchase locks for the second quarter dropped 10% below their expected levels, they’re now up 36% from Q2, per Black Knight’s numbers. This runs counter to normal seasonal trends, which usually see purchase lending peak in June and dip heading into the fall. Instead, purchase locks scheduled to close in the third quarter are currently at 23% above seasonal expectations, and the second and third quarters combined are now more than 6% above expected seasonal volumes based on the pre-pandemic baseline set in January.
“Likewise, while Q2 refinance activity was record-breaking, refi lock data suggests Q3 refinance volumes could climb even higher,” Graboske added. Locks on refis expected to close during Q3, assuming a 45-day lock-to-close timeline, are already up 20% from the quarter prior.
“With market conditions as they are and given the recent delay of the 50 basis points fee on GSE refinances until December, we would expect near-record low interest rates to continue to buoy the market,” said Graboske. “After all, there are still nearly 18 million homeowners with good credit and at least 20% equity who stand to cut at least 0.75% off their current first lien rate by refinancing.”
With more refi opportunities on the horizon, however, servicers are doing a poor job of retaining their clientele. According to Black Knight, only 18% of borrowers were retained post-refinance during the second quarter.
Just 22% of rate/term borrowers and an even more meager 13% of cash-out borrowers remained in servicers’ portfolios after the refi transaction. Graboske noted that while the former figure represents a marked improvement for rate/term retention rate from the first quarter, the numbers together still translate into servicers losing almost 80% of their refinancing customers.
“The data further shows that, though rate/term refinance borrowers are indeed price-sensitive, high-credit borrowers refinancing into [government-sponsored enterprise] mortgages in Q2 received an interest rate only 7 basis points lower on average than borrowers who were retained,” he said.
“While pricing is certainly important, the marginal rate differences between retained and lost borrowers suggest that proactively identifying and marketing to high-risk prepay cohorts may likely be key to raising retention rates.”