LAST YEAR’S REFI BOOM IS OVER – Mortgage Rates Continue to Rise


    by Dave Allen, The International Forecaster:

    As Emily Peck teases, they’re b-a-a-c-c-k. ARMs, that is.

    Adjustable-rate mortgages, which are initially issued with a lower rate than, say, the 30-year fixed rate and jumps up after a certain time period (usually 1, 3 or 5 years), made up about 11% of all mortgage applications last week.

    That’s the highest level since the 2008 Great Recession, according to the Mortgage Bankers Association.

    It’s another way the Federal Reserve’s interest rate hikes are affecting markets and consumer behavior.

    Until recently, 30-year fixed mortgage rates were super low. As of the end of last year, they were hovering just above 3.0%. During the pandemic, they’ve gotten as low as 2.77% last August.

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    It didn’t make sense to take on a riskier adjustable loan; ARM rates have ranged between 2.37% and 2.56% between last August and the end of December.

    Now with rates on 30-year fixed loans more than doubling to around 5.3% this week – and ARMs often coming in at more than a point less – homeowners are going for it.

    Many readers might remember ARMs from the housing bubble that led to the 2008 financial crisis and subsequent bailout.

    Back then, many subprime (unqualified or high-risk) borrowers took out interest-only ARMs with super-low teaser rates that would skyrocket to unaffordable levels – some after 1, 3 or 5 years.

    When their monthly payments went up, many of them couldn’t pay and wound up in foreclosure and bankruptcy.

    Banking regulations and underwriting standards have tightened since then, prohibiting a lot of that kind of stuff.

    Today’s a Different Story…for Now

    In fact, as Peck puts it, today’s ARMs are “far less bonkers.” Freddie Mac’s deputy chief economist Len Kiefer adds, “Very different animals.”

    A popular ARM now is the 5/6, said Bankrate’s Greg McBride. It’s a fixed rate for five years, then adjusts every six months after that.

    And those adjustments are subject to caps – like the 2/1/5 that can’t increase more than 2 points for the first round, then a max of 1 point after that, and can’t go up more than 5 points over the life of the loan.

    Plus, borrowers taking out ARMs now typically have higher incomes and stronger credit ratings than over a decade ago.

    They can afford the higher 30-year rates, but prefer the savings on the ARM, according to McBride, who added:

    “It will be time to worry if loan standards begin to relax [again] and anyone who can fog a mirror is able to get a mortgage. That is not what is happening now.”

    Freddie’s Kiefer wonders, “Is this just a blip?”. A bigger move back to ARMs could be a last-ditch effort to preserve affordability, he said.

    Low fixed mortgage rates made buying in a sellers’ market more affordable in the early stages of the pandemic.

    At the end of February 2020, just before the pandemic was declared in the U.S. the average 30-year fixed rate was 3.45%. By the end of that year, rates were 2.67% – with a couple of blips over 3.0% along the way.

    The trend continued throughout early 2021: from about 2.65% in early January to the start of March, when the 30-year fixed rate started to exceed the 5-year ARMs’.

    And since late July last year, the 30-year fixed rate has continued to climb relative to the 5-year ARM to today – where the rate is 5.3% vs. the ARM’s 3.98%.

    Sales Values Cooling in 2022, But…

    Median home sale values in the Philadelphia region, where I live, have cooled slightly in 2022. They were only up 2.3% year over year, but borrowing money is more expensive now.

    That follows home prices soaring by almost 15% at the end of 2021 year-over-year, plus a record low housing inventory. Yes, burned out buyers could be priced out.

    Now, fewer people are applying for mortgages nationwide, and Redfin found that less of them are starting online searches compared to a year ago.

    At the same time, more sellers are reducing their prices after initially putting their homes on the market.

    Peck notes that a $200,000, 30-year fixed mortgage taken out in April 2021, would have made your monthly principal and interest payment about $840.

    But, she adds, your monthly payment on a $200,000, 30-year loan started in April 2022 would be about $1,100.

    That comes out to $260 more a month, $3,120 more a year and $93,600 more over the life of your loan – no chump change for sure.

    For now, the recent surge in mortgage rates has essentially snuffed out last year’s massive refinancing boom.

    It shows that the Fed’s effort to lift interest rates – belated as it may be – is already starting to bite borrowers.

    The New York Fed’s quarterly report on consumer debt and credit showed a sharp drop in mortgage refinancing activity. Peck reports that originations of refi loans fell 15% to $424 billion in the 1st quarter.

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