This has boosted both consumer spending and asset prices.
By Wolf Richter for WOLF STREET.
Homeowners refinance their homes for two main reasons: first, to take advantage of lower interest rates and thereby reduce monthly payments; or to get cash from their house that has gone up in price. Lower mortgage payments mean homeowners spend a little more money every month. And a cashout refi generates a bunch of cash at once that can be used to remodel the house, buy stocks or cryptos to get-rich-quick, cash out dead credit cards at 25% interest, put down a down payment, etc. on a Rental property or vacation home, or otherwise blow. Both types of refinancing provide additional momentum to consumer spending and markets, including stocks and real estate.
But interest rates have risen sharply in recent months. Average interest rates on 30-year fixed-rate mortgages hit 5.02% yesterday, the highest since November 2018, when it peaked at 5.05%, according to daily measurement by Mortgage Daily News. According to today’s weekly measurement from the Mortgage Bankers Association, the average 30-year fixed-rate mortgage rate hit 4.90%, the highest since December 2018.
And applications for mortgage refis have collapsed. The MBA weekly mortgage application refinance index released today fell to its lowest level since March 2019, 62% lower than a year ago and 82% lower than the March 2020 peak:
No-cash-out refis are motivated by setting lower mortgage rates to get lower monthly payments. They are directly affected by changes in mortgage rates. With mortgage rates being so low for over two years, many homeowners have already refinanced and mortgage rates are far higher than what they are paying lately and refis are off the table.
Withdrawal rates, motivated by the need or desire to withdraw cash, increase as real estate prices rise. And real estate prices have risen historically. And people wanted – and still want – to withdraw money while they could without selling the house.
So homeowners trying to get cash were initially able to fend off the rise in mortgage rates. But these refis have now also started to come down from high levels.
According to the American Enterprise Institute’s Housing Center monthly update for March 28, payout refis in week 12 (March 19-March 25) are down 17% from the same week in 2021, but remained 55% from the same week % increased in 2019.
This was the first period in which cash-out refis showed “some headwind impact from higher interest rates,” according to the AEI’s report.
In contrast, by week 12, non-payable refi volume had collapsed by 85% year-on-year, according to the AEI.
Layoffs at mortgage lenders, yes, but…
The collapse in mortgage refi applications has prompted numerous mortgage lenders to downsize through layoffs that began late last year.
The biggest and most notorious layoffs were at Better.com, a Softbank-backed “tech” mortgage lender startup that had about 9,000 employees at its peak and was scheduled to go public through its merger with a SPAC, which has been postponed and possibly has since been sunk. In December 2021, CEO Vishal Garg personally fired 900 employees, most of them in India, via a Zoom meeting that went disastrously viral. In early March, the company announced another round of layoffs, this time 3,000 employees, including many in India.
PennyMac Financial Services, which employs 7,000 people at 16 locations, announced in regulatory filings in March a series of layoffs in five California cities totaling 236 employees.
Movement Mortgage is laying off 170 employees, according to an April 4 report by HousingWire citing sources.
Winnpointe Corp., which operates as Interactive Mortgage, would lay off more than 50 employees between February and April, according to government documents.
And other layoffs at mortgage lenders are taking place and will continue to take place in this very cyclical business. Thousands of people across the country were laid off as mortgage rates rose in 2018, when refi business collapsed.
But overall, the numbers are relatively small. And with the massive labor shortages everywhere, those folks are likely to find a spot pretty quickly.
The greater impact on the economy and markets.
But the collapse of Refis has bigger implications for the overall economy, the real estate market and the stock market, and even cryptos.
Non-cash-out refis: A homeowner who cuts their mortgage payment by $300 a month through a non-cash-out refi is likely to spend some or all of the extra money over time. And that provides additional fodder for the regular monthly consumer spending. That added boost from lower mortgage payments is now fading.
Cash-out refis are still going strong, but are also facing headwinds now and will face more headwinds in the future. Cash-out refis offer consumers a sudden wad of cash that can come with higher mortgage payments. And that pile of cash is typically used for specific projects, such as: B. a remodeling project, or the repayment of other higher-interest consumer debt, such. B. Credit cards, and some of that is put into stocks and cryptos and down payments for rentals, second homes, vacation homes, etc.
In this way, cash-out refis not only stimulated consumer spending, but also the flow of money into other assets, including real estate, thereby helping to boost the prices of those assets, including the real estate market. And the continued decline in payout refis will remove some of that fuel.
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