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) --An estimated 6 million borrowers remain eligible to refinance their loans, according to the June

Mortgage Monitor

report from Lender Processing Services.

The rapid rise in the 30-year conventional fixed-rate mortgage in May and June to roughly 4.5% has reduced the incentive for borrowers whose rates are already lower than 5% to refinance their mortgage.

According to the report, the pool of borrowers who can refinance has shrunk 33% from 8.9 million in March to 5.9 million in June.

Still, that is at least 12% of active loans that are potentially "refinancible." LPS determines the pool of eligible borrowers by including those who have at least 20% equity in their home, have a credit score of greater than 720 and pay an interest rate of more than 5% on their mortgage.

Refinancing fees have been a steady source of income for banks in recent years, but dropped in the latest quarter reflecting the impact of rising rates.

JPMorgan Chase

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CFO Marianne Lake warned that if rates stay at this level or higher, the refinance market could drop by 30% to 40%.

At market leader

Wells Fargo

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, refinancing represent 56% of total mortgage originations in the second quarter, down from 69% in the first quarter.

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Banks have said they will adjust the size of their business or in other words more layoffs are coming.

Paul Miller, an analyst with FBR Capital Markets, believes servicers such as




Walter Asset Management


could still benefit from refinancing, as average coupon on their servicing portfolios is more than 5%.

The report also pointed to a sharp spike in the mortgage default rate in June. The percentage of borrowers who are 30 days or more past due on their mortgage loans but not in foreclosure rose to 6.7%. That's an increase of 10% from the previous month and is at the highest level since February.

However, LPS noted that the increase was partly due to seasonal reasons. Significantly, quarter-over-quarter, the delinquency rate rose just 1.34%.

Since 1995, delinquency rates have risen from Q1 to Q2 in all but two years, with an average 7 percent increase.

The spike in default rates also had nothing to do with the rise in interest rates according to LPS. "Adjustable-rate mortgages (ARMs), which one would expect to be impacted most by such interest rate changes, actually saw delinquency rates rise at a lower relative rate than those of fixed-rate mortgages," LPS Applied Analytics Senior Vice President Herb Blecher said in a release.

-- Written by Shanthi Bharatwaj New York.

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