Refinance Activity Forecasted to Decline in 2021
Written By: Joel Palmer, Op-Ed Writer
The refinance wave has to slow down at some point, and Freddie Mac is forecasting that it will happen in 2021.
According to Freddie’s latest Quarterly Forecast released last week, total mortgage origination volumes increased over the last several months as many homeowners took advantage of historically low mortgage rates.
“Even as the economy faces challenges from the coronavirus pandemic, the housing market has been showing strength,” said Sam Khater, Freddie Mac’s chief economist. “Refinance activity is solid and homebuyer demand continues, resulting in increased sales and an acceleration in house price growth.”
The forecast calls for refinance originations to total around $670 billion once the full third-quarter results come in. For the full year, Freddie anticipates $2.2 trillion in refinances. However, that number is expected fall almost in half in 2021, to $1.2 trillion.
This predicted drop will come, Freddie said, despite today’s record low mortgage rates to remain mostly unchanged through next year. From the third quarter of 2020 through the end of 2021, Freddie forecasts mortgage rates to remain unchanged at 3 percent.
Refinancing is also expected to slow down even though there is a sizable market remaining.
According to Black Knight, a mortgage technology, data and analytics provider, there were 19.3 million homeowners last month who were prime candidates for refinancing. This was an all-time high, the company said. Black Knight defines high-quality refinance candidates as 30-year mortgage-holders with credit scores of 720 or higher, who hold at least 20 percent equity in their homes and are current on their mortgage payments and who stand to shave at least 0.75 percent off their first lien rate by refinancing.
While this sounds like a golden opportunity for mortgage processors and underwriters, Forbes recently asked the question why so many homeowners haven’t taken advantage. Some of their reasons seem to indicate that few refinance candidates may actually take the opportunity to do so.
Forbes said one possible reason is that people have relied more on credit during the pandemic and have higher debt-to-income ratios. Closing costs and the arduous process of refinancing may also be discouraging potential refinance candidates, according to Forbes. Plus, the potential monthly savings in some markets may not be enough to entice homeowners into refinancing.
Other predictions included in the latest quarterly forecast include:
House price growth is expected to increase to an annual rate of 5.5 percent in 2020. In 2021, that rate is expected to be 2.6 percent. This surge in home sales has put pressure on housing inventory and resulted in an acceleration in house price growth this summer. Total housing inventory declined 18.6 percent in August from the same month a year ago.
Home sales are expected to increase in 2020 to 6.2 million homes and decrease in 2021 to 6.1 million homes.
Purchase originations are expected to increase to $1.4 trillion in 2020 and $1.5 trillion in 2021.
Overall, the Forecast expects annual mortgage origination levels to be $3.6 trillion in 2020 and $2.7 trillion 2021.
In other housing market news, Black Knight reported a slight uptick in loans in forbearance last week. That followed the largest weekly decline in COVID-19 related forbearances the week before.
The company said the national forbearance rate held steady at 5.6 percent week-over-week, with just under 3 million homeowners remaining in active forbearance. This number is down from a peak of 4.76 million in late May.
In the last month, there has been a 19 percent decline in forbearances. Of the remaining forbearance cases, 78 percent have had their terms extended with their servicer.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
