This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Rate Rise Cuts Refi-Eligible Borrowers by Half

Stocks in this article: JPM WFC XLF XHB

NEW YORK ( TheStreet) -- The rise in interest rates has shrunk the pool of borrowers who can refinance profitably by half, according to the latest Mortgage Monitor report from Lender Processing Services.

The latest report offers more proof that the refinancing boom has largely ended. The 100-basis-point rise in mortgage rates since May has led to a sharp decline in refinancing. Prepayment rates have declined 30% over the same period.

Borrowers have less of a financial incentive to refinance when interest rates are rising. Those who still can refinance are those who still pay an interest rate on their mortgage that is high enough for it to make sense -- at least 5% or more. Borrowers not eligible for the Home Affordable Refinance Program need to have at least 20% equity in their homes.

"Over half of borrowers are now 'out of the money' with respect to refinancing," Herb Blecher, senior vice president at LPS noted in his report. "In December 2012, the population of potentially refinance-eligible borrowers stood at roughly 10 million. However, refinance activity during that time, along with rising interest rates, have shrunk that pool to just 5.7 million borrowers as of August."

LPS includes only borrowers with a credit score of over 720 in its calculations of the refinance-eligible population.

Banks have warned that the decline in refinancing volumes will hurt profitability of mortgage operations. JPMorgan Chase (JPM - Get Report), which reports on Friday, has said it expects its mortgage business to report a loss in the third quarter. Wells Fargo (WFC - Get Report) is slashing mortgage jobs in response to the decline in refinancing.

The drop in refinancing volumes is unlikely to be fully offset by a pickup in purchase originations even if banks loosen their credit standards a bit to compete for home loans. In any case, the housing recovery itself is tenuous at the moment, with the rise in interest rates threatening the demand for homes.

One avenue that could open up for banks, however, is home equity loans, according to LPS. "After bottoming out at the beginning of 2012, home prices are now at their highest levels since 2009, and borrowers who bought or refinanced within the last few years are quite likely to have accumulated additional equity in their homes," Blecher wrote. "Based upon LPS' analysis of historical borrowing patterns and home value trends, it is possible that we could see an increase in second-lien borrowing among those who have locked in their first mortgages at very low rates and who wish to tap their equity without refinancing into a higher rate."

LPS also reported mortgage delinquency and foreclosure data for August. About 6.2% of the mortgages were delinquent in August, down from 6.41% in July. The foreclosure inventory rate also continued to decline, falling to 2.66% from 2.88% in July.

-- Written by Shanthi Bharatwaj New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,402.08 -14.77 -0.08%
S&P 500 2,016.07 -5.18 -0.26%
NASDAQ 4,671.5160 -11.8910 -0.25%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs