Consumer spending and asset prices have been boosted.
By Wolf Richter for WOLF STREET.
Homeowners refinance their homes largely for two reasons: first, to benefit from lower interest rates and thus reduce the monthly payment; or to withdraw money from their accommodation, the price of which has increased. Lower mortgage payments leave homeowners with a little more money each month. And a withdrawal refi generates a stack of cash at once, which can be used to remodel the house, buy stocks or cryptos to get rich quick, pay off credit cards at most that carry 25% interest, make a down payment on a rental property or vacation home, or otherwise blow. Both types of refinancing provide an additional boost to consumer spending and markets, including the stock and real estate market.
But interest rates have soared in recent months. Average 30-year fixed mortgage rates hit 5.02% yesterday, the highest since November 2018, when it peaked at 5.05%, according to Mortgage Daily News’ daily gauge. According to the Mortgage Bankers Association’s weekly gauge, the average 30-year fixed mortgage rate hit 4.90%, the highest since December 2018.
And requests for mortgage refis have collapsed. The weekly MBA Refinance Mortgage Demand Index, released today, fell to the lowest level since March 2019, down 62% from a year ago and 82% from the March 2020 summit:
Cashless refis are driven by locking in lower mortgage rates to get lower monthly payments. They are directly influenced by changes in mortgage rates. With mortgage rates being so low for over two years, many homeowners have already refinanced and recent mortgage rates are much higher than they are paying, and refis are irrelevant.
Cash-out refis, which are driven by the need or desire to extract cash, increase with rising real estate prices. And house prices have gone up in historic fashion. And people wanted – and still want – to cash out while they can without selling the house.
So, at first, homeowners trying to extract cash blew up mortgage rates. But those refis have also started to come down from high levels.
According to the American Enterprise Institute’s Housing Center’s monthly update as of March 28, withdrawal refis in week 12 (March 19 to March 25) fell 17% from the same week in 2021, but remained up 55% from the same week in 2019.
This was the first period in which encashment refis showed “some headwind effect from rising interest rates,” according to the AEI report.
In contrast, according to AEI, in week 12, cashless refi volume had crashed 85% from a year ago.
Layoffs at mortgage lenders, yes but…
The collapse in mortgage refinance applications has prompted many mortgage lenders to cut staff via layoffs that began late last year.
The biggest and most notorious layoffs came at Better.com, a Softbank-backed ‘tech’ mortgage lender startup that at the top had about 9,000 employees and was supposed to go public via its merger with a SPAC , which was postponed and may have scuttled by now. In December 2021, CEO Vishal Garg personally fired 900 employees, most of them in India, via a Zoom meeting that went disastrously viral. In early March, the company announced another round of layoffs, this time of 3,000 people, many of them also in India.
PennyMac Financial Services, which had 7,000 employees at 16 locations, disclosed in regulatory filings in March a series of layoffs in five California cities, totaling 236 people.
Movement Mortgage is laying off 170 employees, according to a report by housing cable April 4 citing sources.
Winnpointe Corp., doing business as Interactive Mortgage, would lay off more than 50 employees by April, according to regulatory filings in February.
And more layoffs among mortgage lenders are happening and will continue to happen in this highly cyclical industry. When mortgage rates spiked in 2018, when the refi sector also crashed, thousands of people were laid off across the country.
But the numbers are relatively low overall. And given the massive labor shortages everywhere, these people are likely to find a niche pretty quickly.
The greatest impact on the economy and markets.
But collapsing refis have a bigger impact on the overall economy, on the housing market and on the stock market, and even on cryptos.
No-Cash Refi: A homeowner who lowers their mortgage payment by $300 per month through a No-Cash Refi will likely spend some or all of that extra money over time. And that provides extra fodder for regular monthly consumption expenses. That extra boost from lower mortgage payments is now fading.
Cash-out refis are still strong, but are now also facing headwinds, and will face more headwinds in the future. Withdrawal refis offer consumers a sudden pile of cash that can come with higher mortgage payments. And that stack of money tends to be used for specific projects, like a home improvement project, or to pay off other higher-interest consumer debt, like credit cards, and some of it gets invested in stocks and cryptos, and in installments for rental properties, second homes, vacation rentals, and more.
Thus, cash remittances stimulated not only consumer spending, but also the flow of money to other assets, including housing, and thus helped to drive up the prices of those assets, including on the market. housing market. And the further drop in cash rebates will remove some of that fuel.
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