It wasn’t long ago when mortgage refinancing was king, generating record-breaking profits and driving lenders with more business than they could handle.
During the height of the COVID-19 pandemic in 2020 and 2021, average 30-year mortgage rates in the 2% to 3% range were a boon for business. Mortgage lenders originated $2.57 trillion in refinance loans in those years, according to data from the Mortgage Bankers Association (MBA).
Mortgage companies beefed up their payrolls to manage the explosive loan volume, and many lenders scaled operations and marketing staff to keep the leads flowing and capacity running at full throttle.
Then came 2022 and 2023.
Lenders’ fortunes reversed in a big way as mortgage rates climbed and refi demand screeched to a halt. In 2023, single-family refi volume reached $246 billion, or 33% below 2022’s figure, according to Fannie Mae.
In 2024, refis are expected to rebound slightly with the market poised to see an estimated $490 billion in refi originations, roughly double the volume reached the year prior, Fannie Mae forecasted earlier this year.
But it’s still a far cry from where refinance volume was at the start of the decade. And that means lenders need to fine-tune their businesses accordingly.
Rate-and-term refinancing poised for some growth in 2024
Lower mortgage rates typically coax homeowners off the sidelines and into a rate-and-term refinance if they have a higher rate on their current loan.
The Federal Reserve is expected to cut its benchmark rates up to three times this year, but the timing is still up in the air—especially with the latest core inflation readings showing a surprise uptick.
At the start of the year, a majority of U.S. mortgage holders had rates below 6%, according to a Redfin analysis of third-quarter 2023 data from the Federal Housing Finance Agency’s National Mortgage Database.
- 88.5% of mortgaged U.S. homeowners had a rate below 6%, down from a record 92.8% in Q2 2022.
- 78.7% had a rate below 5%, down from a record 85.6% in Q1 2022.
- 59.4% had a rate below 4%, down from a record 65.3% in Q1 2022.
- 22.6% had a rate below 3%, down from a record 24.6% in Q1 2022.
Since mortgage rates peaked near 8% in October 2023, 1.7 million mortgage holders today—a threefold increase—might benefit from a rate-and-term refinance and lower their mortgage rate by up to 75 basis points, according to a February report from mortgage data provider ICE Mortgage Technology.
If mortgage rates fall to 6% by the end of this year on the heels of Fed rate cuts, as many economists predict, even more homeowners would benefit from a rate-and-term refinance, Andy Walden, ICE vice president of enterprise research strategy, said in a recent statement.
“Under that scenario—a potential needle mover for the refinance market—some 46% of 2023-vintage borrowers would be ‘in the money,’ with nearly a third able to cut a full percentage point off their current rates,” Walden said.
He continued, “As more legacy mortgages regain rate incentive as well, the overall ‘in the money’ population would more than double to 3.8 million by the end of the year, with nearly 60% of that growth coming from loans originated in 2023. Originators would do well to identify and engage with these potential customers now.”
Refinance activity is much harder to pinpoint than the purchase side, because refinances are more reliant on borrowers’ specific financial needs, says Doug Duncan, Fannie Mae’s senior vice president and chief economist.
“There will be some folks most likely who would be in the money,” Duncan tells RISMedia. “A lot of the refinance decision has to do with individual household conditions, like how long you would tend to stay in that property, whether or not you’re going to do some improvements, whether you decide to use a home equity loan or a line of credit—or refinance your first mortgage.”
What lenders see ahead for the refinance market
At most lender shops, the focus as of late has been on generating purchase leads and growing that segment of the business. With plenty of pent-up buyer demand stifled by affordability headwinds, the landscape is increasingly competitive.
But if lenders are going to survive (and thrive) long enough to see refi volumes pick up, they need to focus on the purchase side and ruthlessly trim overhead costs—if they haven’t already, says Jon Overfelt, owner and director of sales of American Security Mortgage in Charlotte, North Carolina.
He describes the current market as one of the “weirdest” he’s seen in more than 20 years of industry practice.
“House prices are so high that there’s no profit in the loans, but (loan) units are also low that you have an infrastructure cost that you have to maintain,” Overfelt tells RISMedia.
While a potential refinance surge would certainly help boost volume, lenders face higher costs to originate refinance loans, Overfelt explains. That’s mostly due to higher processing costs per loan, particularly for credit checks and employment verification, which take a sizable bite out of lenders’ profits, he adds.
“Most of the credit vendors in the mortgage space, their cost is double, if not triple…same thing with the verification of employment fees,” Overfelt says. “You’ve got to have those at some point in the transaction.”
With inventory so limited, if a loan officer has 10 mortgage applicants to qualify and pull credit on, just one of those 10 applicants will ultimately make it to the closing table on a home purchase, Overfelt says.
As a result, the lender “eats” the credit and employment verification costs on the front end for loans that don’t close, Overfelt adds.
Duncan agrees that cost control will be a major key for lenders in the months ahead.
“If you go out and talk to lenders out in the field, their motto is survive till 25,” Duncan says. “It’s a rough, rough market. You can see in their profitability measures there’s still a significant number of them that are in business but losing money. The key is going to be cost control and efficiency improvement because they will need to stay in business.”
If mortgage rates tick down in the 5% to 6% range, borrowers may be more interested in trading in their current lower rate for a slightly higher one if it means consolidating high-interest debt or ditching costly private mortgage insurance (PMI) premiums.
Another refinance incentive that could drive higher activity is tapping home equity. Some homeowners with a low-rate mortgage might look to cash-out refinancing to consolidate and pay off high-interest debt or other financial needs, says Christy Bunce, president of New American Funding.
Americans’ credit card debt reached a staggering $1.13 trillion in the fourth quarter of 2023, according to data from the Federal Reserve Bank of New York. That’s $50 billion more than the previous quarter and $143 billion higher on a year-over-year basis.
“I definitely think we’ll see more debt consolidation for sure,” Bunce says. “So it’s good that we’ve got a pretty big sales force that is focused on refinance, we have a pretty big call center. People are thinking that the purchase market is really going to take off if these rates go down, but, honestly, even though all the headlines say inventory is up, the inventory is still very low.”
8 tips for lenders to boost refinance business
If you’re a loan officer or a leader within a mortgage company, here are some actionable strategies to optimize your refi business and prepare for a potential rebound in mortgage refinancing later this year.
1. Embrace technology for efficiency. Implement technology that automates document verification, income calculation and eligibility assessments. These systems can significantly cut down processing time and free up loan officers to focus on building borrower relationships and lead nurturing.
“The mortgage industry is kind of at this precipice as a whole,” Bunce says. “A lot of companies are out there working on a lot of technology to either speed up the process and make it more economical for the lenders or for the customers to make it an easier process.”
2. Streamline and automate processes with Artificial Intelligence (AI). Adopting AI-powered tools for pre-qualification screening and risk assessment can identify potential borrowers who would benefit from a refinance, saving you time and resources on leads that aren’t a good fit. AI can help you dial in on and automate your Customer Relationship Management system so you can automate emails, texts and other more personal touchpoints, Overfelt says.
“You do need to be in contact with your customers because this go-around, servicers will be playing for keeps when it comes to refinances,” he says.
3. Standardize refinance offerings. Develop standardized loan packages with clear borrower requirements and guidelines. Make sure you understand any new loan program requirements, fees or other elements so you can educate clients, too. This helps clients understand how to qualify for a refi and what documents are needed upfront while streamlining the refi application process.
4. Cross-train loan officers. Equip loan officers with the knowledge and skills to handle both rate-and-term and cash-out refinance options, or take a refresher course on the key refi programs your company offers. Having updated training will empower you (or your loan officers) to serve a broader set of borrowers’ needs and improve overall efficiency.
5. Build strategic partnerships to mine for leads. Collaborate with real estate agents to identify potential refinance candidates among their client database. Another way to find potential refi leads is to partner with credit counseling agencies or community groups to offer cash-out refi workshops.
6. Manage your company’s overhead costs. Trim unnecessary costs (if you haven’t already) to ensure you’re well-positioned for success. Many lenders have already undergone this painful exercise through layoffs, mergers or acquisitions.
“I honestly think that if you haven’t downsized to what the current market is today, you’re going to be in trouble,” Bunce says. “I think one thing that we do a good job at now is really watching the data and pouring into what we’re seeing, and not being wooed by headlines and thinking it’s going to turn around. We are pretty good about keeping the right-size staff but for the volume that we are currently doing.”
7.Track refinance costs. Meticulously track refi loan costs, including technology spending, third-party services and employee time. Regularly analyze this data to identify areas for cost reduction and improved efficiency.
8. Benchmark refi loan performance. Compare your refinance processing times and closing costs against industry benchmarks. This exercise can expose inefficiencies in your internal processes so you can improve closing times, limit friction in underwriting and smooth out any bumps in the borrower experience.
