Holding Off: Why High-Mortgage-Rate Loans Aren’t Being Refinanced

A recent report from CoreLogic further examines the refinance option for outstanding first mortgages in the CoreLogic servicer-contributed database. In a previous report, the company found that most mortgages have interest rates low enough that refinancing would not be a money-saving venture.  But in this new report, CoreLogic seeks to understand what is happening with those borrowers holding mortgages with interest rates that are well above the level that would save them money.

Using the outstanding mortgages as of the end of May 2016, CoreLogic found that 41 percent of mortgages, representing 31 percent of the outstanding unpaid principal balance (UPB), have mortgage rates greater than 4.38 percent. The report states that this is roughly 100 basis points higher than the current market rate for a 30-year mortgage. CoreLogic states that this could be considered to be “in the money,” where refinancing makes financial sense.

The report notes that a large portion of in-the-money mortgages have rates between 4.38 percent and 5 percent, and this represents 18 percent of all mortgages and 17 percent of UPB. Additionally, 23 percent of all outstanding mortgages have rates above 5 percent so CoreLogic asks the question, “Why would a borrower holding a mortgage rate that high not exercise their refinance option?”.

In order to try and answer this, CoreLogic searched deeper into the higher-mortgage-rate loans, and looked at their delinquency status and investor type. The report states that what was discovered was the serious delinquency rate is higher for higher-rate mortgages. Specifically, this means that 12 percent of mortgages in the 7 percent or higher range are 90 days or more past due. CoreLogic feels that this explains why a portion of these borrowers haven’t refinanced saying “they are behind on their payments and most likely wouldn’t be able to qualify for a new mortgage.”

Additionally, CoreLogic also examined the delinquency history of outstanding mortgages to determine whether they have ever been delinquent by at least 30 days. CoreLogic then removed loans that are in private-label securities. Their reason behind this was those borrowers might have a more difficult time refinancing because they would not be eligible for HARP. The report states that after eliminating those mortgage that have ever been delinquent and those held in private-label securities, CoreLogic found that the share of “in the money” loans with interest rates greater than 5 percent falls to 13 percent of all outstanding mortgages, and 7 percent of UPB.

CoreLogic finished their analysis discussing UPB stating small outstanding balances may not be worth refinancing because they believe the resulting savings would be low. The report states that borrowers holding the highest mortgage rate have very low UPB with an average of about $53,000 outstanding for loans with rates of 7 percent or more.

The report concludes stating that without considering credit impairments or investor type, CoreLogic has determined that a large share of mortgages are best prepared for refinancing, with 23 percent of outstanding first mortgages having rates above 5 percent. The report states that once removing loans that are currently seriously delinquent, have ever been delinquent, or are in private mortgage pools, this share of mortgages above 5 percent though decreases to 13 percent. Then, it is determined that of this remaining group, average loan balances typically are small. The report states that this indicates that while mortgage rates are near historical lows, there may not be many borrowers left who have the incentive or are eligible to refinance.