Shifting Mortgage Markets: Purchase Loan Applications 30% More Likely To Close Than Refinance Ones
Purchase mortgage transactions continue to outnumber refinance ones.
On February, for the 8th straight month, mortgage lenders closed more loans for U.S. home buyers than for homeowners refinancing an existing mortgage. The market share statistic takes on added weight when we consider that nearly one-third of all home purchases are done with cash.
Low rates have kept the refinance market warm, but purchase market activity remains hot.
Home Buyers Crowd The U.S. Market
According to mortgage origination software firm Ellie Mae, which handles more than 3 million mortgage applications per year, purchase mortgage closings grabbed an additional four percentage points in market share this past February as compared to the month prior, marking the eighth consecutive month during which purchase market share climbed.
Purchase loans as a percentage of all closings have increased 25 percentage points in the past 12 months.
There are several reasons why today's purchase loans are gaining market share. The first is that home prices have steadily and slowly climbed nationwide, which has created an urgency among today's U.S. buyers.
Home values are up more than 10 percent annually in many U.S. cities going back to 2011, with values are up more than twenty percent in select cities including San Francisco, Los Angeles and Las Vegas.
Home supplies remain tight, too.
In February, for the 18th straight month, home supply was below 6.0 months nationwide. Supplies of less than six months suggest a "Seller's Market", which is characterized by rising prices and multiple-offer situations.
In addition to rising values, rising mortgage rates have contributed to an increase in purchase market share.
Last year, February's mortgage rates hovered near 3.5% nationally. This year, they're almost one point higher. The jump has reduced the number of refinance-eligible households nationwide, which has reduced the number of refinance closings.
According to the Federal Home Finance Agency (FHFA), there was a 339% decrease in the number of closed refinances for the 12 months ending in January. However, refinance opportunities remain plentiful.
With mortgage rates moored in the mid-4s, there are literally millions of U.S. homeowners eligible to refinance who have yet to get started despite the typical refinancing household saving than 25% monthly via a refinance.
This includes homeowners using the Home Affordable Refinance Program (HARP) and other streamline refinance programs, too.
Lastly, purchases may be outnumbering refinances because more purchase loans are making it through the underwriting process.
In February, Ellie Mae reports that 62% of purchase loan applications made it through to closing, the highest rate since the firm began tracking such information in 2011. By contrast, just forty-seven percent of refinance applications actually closed.
Ellie Mae : Mortgage Approval Statistics
The February 2014 Ellie Mae Origination Insight Report also offers insight into today's typical loan approval, and the makeup of today's mortgage borrowers.
As one example, home buyers using FHA financing are making a relatively constant five percent downpayment, on average. However, the borrower's credit profile is decidedly worse as compared to one year ago.
This year's FHA borrower carries a credit score which, at 686, is thirteen points lower than the FHA borrower of last year. One reason why average FHA scores are dropping is because major lenders have lowered minimum FHA credit score requirements.
Another reason is the introduction of the FHA Back to Work program which allows an FHA borrower to get access to a mortgage just 12 months after a bankruptcy, foreclosure or short sale.
Other data from the Ellie Mae report :
- The average FICO for an approved conventional purchase loan was 724 in February, down 21 points from last year
- FHA mortgages accounted for 22% of all February loans -- the highest in 10 months. This is, in part, related to the November 2013 termination of the Fannie Mae Conventional 97 program, which allowed for 3% down.
- The average mortgage took 41 days to approve -- the fewest in six months
Also noteworthy in the February report was data showing an increase in conventional refinances requiring a loan-to-value of 95% or greater.
More than 12 percent of February's closed conventional loans carried an LTV of 95% or higher -- a two percentage point increase over the average of last year. This suggests that HARP mortgage refinancing for underwater homeowners is an important part of today's refinance market.
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Ellie Mae's February Origination Report shows a U.S. housing market moving toward purchase business. Yet, refinance opportunities remain plentiful with mortgage rates still low.
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