New report shows who took advantage of the Covid refi boom

The U.S. mortgage market faced a new “refinance boom” when mortgage rates declined by nearly 200 basis points between November 2018 and November 2020, following the Federal Reserve rate cuts that were made to remedy the economic impacts of the Covid-19 pandemic.  

Researchers at the Federal Reserve Bank of New York estimate the size of this boom in a new report. From the second quarter of 2020 to the fourth quarter of 2021, 14 million mortgages were refinanced, accounting for nearly one-third of the outstanding mortgage balances.  

The data, published on Monday, shows that older vintage mortgages (loans originated before 2010) accounted for under 9% of the total refinanced during the Covid-19 refi boom. This contrasts with nearly a third of mortgages refinanced from 2015 and later vintages. 

As it makes sense to refinance if the balance is higher, less than 10% of the mortgages with balances below $100,000 outstanding as of the first quarter of 2020 were refinanced, compared to half of those with balances between $400,000 and $500,000. 

When broken down by investor type, 38% of U.S. Department of Veteran Affairs mortgages outstanding as of the first quarter of 2020 were refinanced by the end of 2021, compared to 25% of Fannie Mae and Freddie Mac mortgage loans and 22% of Federal Housing Administration mortgages. 

According to the New York Fed researchers, the refi boom will have impacts for decades.

About 64% of the refis were for borrowers to get better rates, which resulted in an average payment reduction of $220. Nine million borrowers refinanced their loans without equity extraction, with an aggregate decrease of $24 billion annually. 

In addition, five million borrowers extracted $430 billion of home equity through cash-out refis. The average amount cashed out was $82,000, and the average monthly payment increased by $150. 

“The mortgage refinancing boom is over, but its impact will be seen for decades to come,” Andrew Haughwout, director of Household and Public Policy Research at the New York Fed, said in a statement. 

“As a result of significant equity drawdowns, mortgage borrowers reduced their annual payments by tens of billions of dollars, providing additional funding for spending or pay downs in other debt categories,” Haughwout added.   

According to the researchers, the 2020-2021 refi boom differed from the refi booms in 2003 and 2013 for three reasons: Interest rates were historically low; home equity was at an all-time high leading to the pandemic; and the rebound in rates was historically steep.

In fact, when the market turned, the 30-year mortgage rates rose by 400 basis points, climbing from a historically low rate of 2.68% in December 2020 to 6.90% in October 2022. Such an increase had not been seen since early 1980, per Freddie Mac’s estimates. 

And, the mortgage market is still recovering.

The New York Fed’s Center for Microeconomic Data shows in its Quarterly Report on Household Debt and Credit that mortgage originations – measured as appearances of new mortgages on consumer credit reports – dropped in Q1 2023 to $324 billion. 

That’s the lowest level seen since Q2 2014, which was an unusually low quarter due to the “taper tantrum.”

Meanwhile, the pace of equity extraction halted when mortgage rates began climbing. Quarterly equity extraction volumes were near historic lows in the first quarter of 2023, mainly as a share of disposable personal income, researchers said.  

“Owners now looking to move will face increased borrowing costs and higher prices, with current home prices being more than 36% higher than they had been pre-pandemic,” the researchers concluded. “The improved cash flow generated by the recent refinance boom will potentially provide significant support for future consumption.” 

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