Consumer spending and asset prices have both boosted.
By Wolf Richter for WOLF STREET.
Homeowners refinance their homes largely for two reasons: First, to take advantage of lower interest rates and therefore reduce their monthly payment. or extract cash from their home whose price has risen. Lower mortgage payments allow homeowners to spend a little extra cash each month. And a redemption refi creates a lot of cash at the same time, which can be used to renovate the house, buy shares or encrypt to get rich quick, pay off credit cards with a maximum interest rate of 25%, make a deposit on rental property or cottage, or blow in other ways. Both types of refinancing provide additional impetus to consumer spending and markets, including the stock market and real estate.
But interest rates have skyrocketed in recent months. The average 30-year fixed mortgage rates reached 5.02% yesterday, the highest since November 2018, when they peaked at 5.05%, according to the daily measurement of Mortgage Daily News. According to today’s weekly measurement of the Bank Mortgage Association, the average fixed interest rate on mortgages for 30 years reached 4.90%, the highest since December 2018.
Applications for mortgage refs have also collapsed. The weekly MBA Refinancing Mortgage Application Index, released today, fell to its lowest level since March 2019, down 62% from a year earlier and 82% from its peak in March 2020:
Cashless refs are motivated by locking in lower mortgage rates to get lower monthly payments. They are directly due to changes in mortgage rates. Mortgage rates have been so low for over two years, many homeowners have already refinanced and recent mortgage rates are much higher than they pay, while mortgage rates are off the table.
Cash-out refs, which are driven by the need or desire to export cash, increase with rising house prices. And housing prices have skyrocketed. And people wanted – and still want – to raise as much cash as they could without selling the house.
So, in the beginning, homeowners trying to extract cash threw in the air raising interest rates on mortgages. But even these reefs have started to fall from high levels.
According to the Housing Center of the American Enterprise Institute monthly update As of March 28, cash-out refs in week 12 (March 19 to March 25) decreased by 17% from the same week of 2021, but remained increased by 55% from the same week of 2019.
This was the first period that cash-out refs showed “some effect from the opposite winds of higher interest rates”, the AEI report states.
By contrast, according to the AEI, by week 12, the non-cash refi volume had collapsed by 85% compared to a year earlier.
Layoffs to mortgage lenders, yes, but…
The collapse of mortgage refi applications has caused many mortgage lenders to restrict staff through layoffs that began late last year.
The biggest and most notorious layoffs occurred on Better.com, a Softbank-backed mortgage technology startup that had about 9,000 employees at its peak and was supposed to go public through its merger with a SPAC. which has been postponed and may have been destroyed by now. In December 2021, CEO Vishal Garg personally laid off 900 employees, most of them in India, through a Zoom meeting that went viral. In early March, the company announced another round of layoffs, this time of 3,000 people, many of them in India.
PennyMac Financial Services, which had 7,000 employees in 16 locations, revealed in a regulatory filing in March a series of layoffs in five California cities totaling 236 people.
Movement Mortgage is firing 170 employees, according to a post HousingWire on April 4 citing sources.
Winnpointe Corp., which operates as Interactive Mortgage, will lay off more than 50 employees by April, according to regulatory filings in February.
Other layoffs between mortgage lenders are happening and will continue to happen in this very circular business. During the rise in mortgage rates in 2018, when the refi business collapsed, thousands of people were laid off across the country.
But the numbers are relatively small in the general shape of things. And given the huge labor shortages everywhere, these people are likely to find a job fairly quickly.
The biggest impact on the economy and markets.
But the collapse of refs has a greater impact on the overall economy, the housing market and the stock market, and even cryptocurrencies.
Non-cash refis: A homeowner who reduces his or her mortgage payment by $ 300 a month through a non-cash refi will likely spend some or all of that extra money over time. And that provides extra food for regular monthly consumption. This additional boost from lower mortgage payments is now waning.
Cash-out refs are still strong, but now they also face headwinds and will face further headwinds in the future. Redemption refs provide consumers with a sudden stack of cash that can be accompanied by higher mortgage payments. And this pile of cash tends to be used for specific projects, such as a remodeling project or repaying other debts of higher interest rate consumers, such as credit cards, and some of them are plowed into stocks and encryption and down payments for rental properties, secondary residences, holiday homes etc.
In this way, cash-out refs boosted not only consumer spending but also the flow of money into other assets, including housing, and thus helped to increase the prices of these assets, including the housing market. And further reductions in cash-out refs will remove some of that fuel.
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