Millions of homeowners stand to benefit from refinancing as 2020 has seen very low interest rates and extraordinary effects of COVID-19. (Courtesy photo)

Market Musings: Pandemic brings new surge of refi madness

Mortgage business booms with appealing rates, uncertain market

What have you done with your bonus quarantine time? Make a sourdough bread starter? Learn to play the oboe? For mine, I looked for and purchased a new house. How I managed to pull this off during the apocalypse is not germane to this story. I will tell you, though, that the internet was heavily involved. Also, there were masks.

What is relevant to this story is the early July stretch I spent biting my nails, waiting for my loan documents. Where were they? Buried under a mountain of other people’s refinances. “There’s a backlog,” my stressed-out loan officer told me. “All of these people are refinancing.”

According to a recent study done by loan research and analytics firm Black Knight, 15.6 million Americans stand to save $300 a month or more by refinancing. That fact has not gone unnoticed, especially since mid-July, when the average rate for a 30-year fixed rate mortgage fell below 3 percent.

This hasn’t happened at least since 1971, which was when they started keeping track of such things. Never before have we seen a “two,” and the mad dash to refinance — 50 percent of homeowners are presently holding loans whose interest rate starts with a “four” — left those like me, who are purchasing new homes, in second position, waiting for their docs.

But refi madness is part of modern life, isn’t it? Rates go down; people refinance. Is there any reason why, besides the obvious (masks, quarantine, riots, loaves of home-baked bread) 2020 is different? It’s tempting, of course, to chalk up the rush to refi as another symptom of Blanket 2020 Theorem, in which everything is as weird and crazy as it can possibly be, simply because it’s happening this year. Is that the case?

Over the past 25 years we’ve seen multiple booms and one three-year bust. Looking back at data from that span, we can see that, well, yes, 2020 is a weird outlier for refinancing. It’s the rates, sure, but this time it feels different.

Historically, low rates and flush markets of the type we were still experiencing early this year push homeowners toward a certain type of refi, namely the type where an owner with equity chooses to use his or her home as an ATM machine. For example, in 2006 and 2007, at the peak of the second housing bubble, over 80 percent of refinances were “cash-back,” in which new refi loans were at least 5 percent larger than the ones they replaced. And why not? Homes were increasing by double-digit values every year. Sure that would continue. Why not remodel that bathroom and push that resale value even higher?

And then the bottom fell out. Homes stopped appreciating. The percentage of borrowers doing cash-out fell and kept falling, bottoming out at 17 percent in 2011. Homeowners held onto their loans longer — an average of 4.2 years, compared to 3.4 in 2007 (and 1.9 in 2003, the lowest during the past 20 years) — before refinancing. In the years during and after the recession, the only reason to refinance was to take advantage of low interest rates.

But then rates stayed low and property values ramped back up. Gradually, borrowers re-warmed to cash-out loans. By 2019, when 77 percent did cash-out, we were almost back to 2007 levels. Average age of a refinanced loan, which had stretched to 7.7 years in 2017, was also gradually falling, to 5.1 years in 2019.

The key word here is “gradually.” We don’t do “gradually” in 2020 any more than we do “subtle.”

This year, the percentage of borrowers doing cash-out has dropped sharply, to 42 percent. That’s the biggest year-over-year change recorded in the past 25 years. And borrowers are hanging onto their loans for 2.4 years, less than half of 2019’s 5.1 years, before refinancing. This is also the biggest year-over-year change recorded since 1996.

For the past quarter-century, refinancing trends have been driven by two major factors: property values and interest rates. This year, with 64 percent of all loans being refis, they’ve been joined by some new variables: economic uncertainty and a diminished real estate market.

Bluntly put, there wasn’t much real estate to buy during the first quarter of 2020, and with unemployment soaring and gloomy headlines shouting at us from every corner, there’s never been a population more motivated to shave a few hundred dollars off of their mortgages. Add to that interest rates that start with a two (and the rare newspaper columnist trying to buy a house) and it’s a perfect storm for the mortgage biz. And with economic experts predicting low rates for the next year and epidemiologists seeing no easy end to the pandemic, it’s looking like anything but a brief squall.

Larry Rosen is a San Francisco-based writer, editor, podcaster and recovering former Realtor. He is a guest columnist and his viewpoint is not necessarily that of the Examiner. The Market Musings real estate column appears every other week.

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