Ellie Mae: Low interest rate environment sends refinance activity soaring in August

Ellie Mae’s latest Origination Insight report shows that the 30-year note rate dropped for the eighth consecutive month as of August, spurring an increase in the percentage of refinances.

In August, the 30-year note rate dropped to 4.07%, falling from 4.18% in July. This decrease attributed to an uptick in refinances, which accounted for 43% of all loans during the month, according to the report.

“The drop in interest rates month-over-month continues to drive up the percentage of refinances, which accounted for 43% of all loans in August, up from 38% the month prior,” Ellie Mae stated. “Purchase percentages as a share of all loans dropped under 60% for the first time in 2019.”

To get a meaningful view of lender pull-through, Ellie Mae said it reviewed a sampling of loan applications initiated 90 days prior to calculate an overall closing rate of 77.3% in August.

According to Ellie Mae, closing rates on purchases increased to 80% during the month, while closing rates for refinances dropped slightly to 72.5%.

However, the percentage of refinances increased across the board last month, with FHA refinances climbing from 24% to 27%.

Conventional refinances rose from 42% in July to 46% in August,  and VA Refinances ticked up from 31% in July to 34% in August.

Overall FICO scores increased from last month’s 731 to 734, while LTV decreased to 78 and DTI remained at 24/37, according to the report.

Interest rates continue to decline and we’re seeing homeowners capitalize on the refinance opportunity throughout the month of August,” said Jonathan Corr, president and CEO of Ellie Mae. “As we enter the fall and the market expects further rate cuts from the Fed, we will watch to see if the share of refinances continues to climb further

NOTE: Ellie Mae’s Origination Insight Report focuses on loans that closed in a specific month, comparing their characteristics to similar loans that closed three and six months earlier. The closing rate is calculated on a 90-day cycle instead of a monthly basis.

Refinancing Will Remain Strong in 2019

Over the last year, banks narrowed their spreads for most commercial real estate sectors, according to the April 2019 Federal Reserve Board quarterly survey of senior loan officers. They also increased the maximum size of loans and increased the length of interest-only payment periods. The senior loan officers cited more aggressive competition from other banks and nonbank lenders as an important reason for easing.

This modest easing of standards is one reason that so many owners chose to refinance in 2018, a development that is amply documented in the Meridian Capital Group Commercial Real Estate Survey. Almost 60 percent of the industry professionals responding to the survey reported that their firm had opted to refinance at least one property in 2018 rather than sell.

Balance sheet lenders confirmed this finding. They reported substantial increases in refinancing activity. Over the past two years, the majority have seen their refinancing activity increase. Slightly less than 60 percent said that refinancing accounted for between 25 and 49 percent of their lending activity over the past two years—and 21 percent said that between 50 and 75 percent of their lending was due to refinancing.

The Conditions Favor Refinancing

Looking forward, both investors and banks expect refinancing to continue at the current level. Most investors expect to refinance less than 25 percent of their assets in 2019, but a significant group, 22 percent, is considering refinancing between 25 and 49 percent of their portfolio. Over 60 percent of balance sheet lenders responding to the survey expected refinancing to remain about the same.

Interest rates will also influence refinancing decision this year. In early March, the Federal Reserve cancelled plans to raise benchmark interest rates in 2019, precipitating a drop in the 10-year Treasury in April and May to between 2.2 and 2.6 percent. This is a significant decrease from its highs of around 3.2 percent in October and November 2018 and served as a reminder to investors to lock in low rates while there still was an opportunity to do so, especially in cases when they held adjustable rate loans. Although economic tensions can influence rates, 57 percent of owners say that they are unwilling to take on floating-rate debt in the current environment.

In other words, all the conditions are in place—a modest easing of lending standards and historically low interest rates—to confirm the trend expressed by borrowers and lenders alike in the Meridian Capital Group survey that refinancing will remain strong for the near future.

The Meridian Capital Group Commercial Real Estate Survey was conducted online between November 13, 2018 and December 6, 2019 by Signet Research, an independent research company, and is based on the response of 1,849 industry professionals.