More than 8.6 million borrowers in the U.S. with 30-year mortgages could qualify for and benefit from refinancing as of this past June, according to a recent market analysis. Like the proverbial carrot on a stick, these potential customers dangle just out of range waiting for the right enticement.
This number, however, represents an increase of 3.5 million potential refinance candidates from the end of 2015, driven largely by interest rates returning to near-historic lows, even after the Federal Reserve raised the federal funds rate for the first time in nine years. After waiting on the fence for so long, and worrying about the potential impact of coming rate increases, it turned out mortgage rates actually fell when global economic shocks earlier this year sent investors into the safe haven of U.S. Treasuries, driving down yields on benchmark 10-year bonds.
These historic low rates are a unique situation in the interest rate environment. To add another twist to the market, U.S. Treasuries again gained favor among investors in the wake of the United Kingdom’s “Brexit” vote to leave the European Union, which sent mortgage interest rates chasing ever-new lows. Faced with this uncertain environment, when the Federal Open Market Committee (FOMC) met this past June, it again left the target rate unchanged even though many people predicted multiple interest rate increases would occur throughout 2016.
If rates do increase, purchase volumes will likely suffer as housing becomes less affordable. Home prices are already up significantly, with one price index showing 48 consecutive months of annual increases in home-price appreciation as of this past April. Rising rates, however, could lead to purchase activity leveling off, which could slow down home-price appreciation as well.
Some companies have been preparing for rate hikes by looking to increase originations of home equity products. If rates increase, home-equity loans and lines of credit become more attractive to borrowers who are looking to tap their home’s equity without jeopardizing their low first-mortgage rates.
The industry waited a long time for that first rate increase this past December. Now, in light of current economic conditions, plus uncertainty around the impact of the Brexit vote and the upcoming U.S. elections, the multiple rate step-ups projected for 2016 are becoming more and more unlikely.
Potential refinance boom
This all brings us back to those 8.6 million borrowers mentioned earlier. When examining broad-based eligibility criteria, these borrowers make good refinance candidates. They have credit scores of at least 720, loan-to-value (LTV) ratios of 80 percent or less and are current on their mortgage payments. In addition, they have 30-year first mortgages that are at least 75 basis points above the current prevailing rate.
Digging down into those numbers, you find that approximately 1.4 million borrowers crossed the threshold of 20 percent equity in the past 12 months alone, allowing them to meet the LTV requirement to qualify for mortgage refinance. Over that same period of time, about 800,000 borrowers saw interest rates decrease to a point where they would benefit from refinancing.
Then — as if specifically designed to provide an example of the unpredictability of the current interest rate environment — rates fell again in the wake of the Brexit vote, causing an additional 1.2 million borrowers to gain interest rate incentives to refinance that they lacked just weeks before.
It is particularly striking, however, that 4.9 million borrowers — nearly 60 percent of all borrowers eligible for refinance — also met eligibility requirements in early 2015 when rates were comparable to the historic lows reached just after the Brexit vote. These borrowers did not take advantage of refinancing at that time either, so what is keeping them on the fence?
Part of the issue is awareness. The data makes it clear that a portion of the borrower population stays intimately attuned to interest rate movements and acts on them quickly and repeatedly. In fact, these “serial refinancers” played a large role in the rise and fall of mortgage-refinance volumes throughout 2015.
As rates dropped in early 2015, refinances from borrowers who had held their prior loans for less than two years jumped by 800 percent. Likewise, when rates rose later in the year, this population dropped by 65 percent, and two-thirds of refinances came from borrowers who had their prior mortgages in place for four or more years.
These serial refinancers are obviously well-informed about the refinance process and its benefits. On the other hand, the 4.9 million borrowers who did not refinance their current mortgages — but could qualify for and benefit from refinancing — may simply not be as well-informed.
It also is possible that many of these borrowers had already gone through refinancing several years ago and believe their current 4.5 percent rate, which is substantially better than their prior 6 percent or higher rates, can hardly be improved upon. This is a misconception that originators can correct through communication.
Nearly 40 percent of the mortgages for these refinance candidates were originated between 2009 and 2011, during the downturn of the market. This suggests that this segment may not be aware of just how much the landscape has changed in the past five to seven years — or the fact they now have sufficient equity built up to qualify for refinancing.
Proactive, informative outreach could be the key to getting these borrowers off the fence, especially for those originators that can identify qualified refinance candidates within and beyond their company’s portfolio.
Time to act
From an originator’s perspective, it may seem that if you have a borrower in a 5 percent first mortgage, the smart approach would be to keep that loan where it is. In a slow-growth environment, however, companies gain market share by capturing it from competitors. If you aren’t actively courting that customer for a refinance, someone else will.
In this market, originators need to become more efficient and shave margins to offer more competitive rates. Unfortunately, it could be a choice between remaining competitive or laying off valuable personnel when volumes decline or customers move to competitors. It is better to focus on portfolio retention and capturing market share.
That is why now is the perfect time to reach out to these 8.6 million potential customers and lock them into lower mortgage rates. Based on previous behavior patterns, if you lock in these borrowers at 3.6 percent or 3.75 percent, they likely will stay exactly where they are — with you — through the next eight or more interest rate cycles. If home price appreciation continues on a sustainable trajectory, these borrowers could make good home equity customers around the corner as well.
The only question, then, is how to identify this pool of customers so you can capitalize on the opportunity that exists within the vast population of qualified borrowers with home equity, good credit scores and interest-rate incentives to refinance?
Data and analytics
Successfully capitalizing on any opportunity in the mortgage industry requires access to the best possible data, and the tools and expertise to produce high-quality analysis of that data. With access to proper data and analysis, you can easily identify customers within your first-mortgage portfolios who would make good candidates for refinancing because they meet the necessary thresholds for current combined LTV, credit score and current interest rate.
From there, you can deploy targeted and individualized informational-marketing efforts. Just imagine the value to a customer of communication that gives them specific benefits they could reap by refinancing. Even better, as your marketing campaigns progress, proper data analysis allows you to use previous results and statistical modeling to assess the effectiveness of your messages so you can further fine tune and improve future marketing efforts.
By combining in-house data with quality, robust property records, databases, industry-leading valuation technologies and third-party data sources, you also can expand your refinance marketing efforts well outside your own portfolios. Knowing, for example, which homeowners within your area of operations meet basic criteria, such as current interest rate, estimated property value and equity level, can help you produce highly targeted marketing campaigns.
The key to all of this is finding a trusted data provider that not only has the data assets to supplement your own internal sources, but also the technology, skills and expertise to build a wider system of data and provide deeper lending insight.
That kind of support can make it possible to take advantage of this interest rate environment and reach some of the millions of borrowers who qualify for mortgage refinancing. The right data partner also can help position you to seize almost any new opportunity that presents itself down the road, so you can get more borrowers off the fence and into your portfolio.