Why Don’t High-Mortgage-Rate Loans Get Refinanced?

In a recent blog we looked at the refinance option for outstanding first mortgages in the CoreLogic servicer-contributed database. We found that most mortgages have interest rates low enough that refinancing would not be a money-saving venture.  But what is happening with those borrowers holding mortgages with interest rates that are well above the level that would save them money? Using the outstanding mortgages as of the end of May 2016, we find that 41 percent of mortgages, representing 31 percent of the outstanding unpaid principal balance (UPB), have mortgage rates greater than 4.38 percent. That is roughly 100 basis points higher than the current market rate for a 30-year mortgage[1], and could be considered to be “in the money,” where refinancing makes financial sense. A large portion of in-the-money mortgages have rates between 4.38 percent and 5 percent, representing 18 percent of all mortgages and 17 percent of UPB. Twenty-three percent of all outstanding mortgages have rates above 5 percent. Why would a borrower holding a mortgage rate that high not exercise their refinance option?

We drilled down deeper into the higher-mortgage-rate loans, looking at their delinquency status and investor type. Figure 1 shows the serious delinquency rate (those loans 90 or more days past due or in foreclosure) of outstanding mortgages by current mortgage rate. The serious delinquency rate is higher for higher-rate mortgages, with 12 percent of mortgages in the 7 percent or higher range being 90 days or more past due. This explains why a portion of these borrowers haven’t refinanced: They are behind on their payments and most likely wouldn’t be able to qualify for a new mortgage.

Beyond mortgages that are currently in serious delinquency, we also examine the delinquency history of outstanding mortgages to determine whether they have ever been delinquent by at least 30 days. To qualify for a low interest mortgage, borrower credit would need to be very good, and having ever been delinquent on a mortgage would negatively affect a borrower’s credit.[2] Figure 2 shows the share of outstanding mortgages that have ever been 30 days past due. This “ever-30” rate is lowest for the lowest-interest-rate mortgages and climbs to 50 percent for the highest-interest-rate mortgages. Finally, we remove loans that are in private-label securities, because those borrowers might have a more difficult time refinancing because they would not be eligible for HARP[3]. After eliminating those mortgage that have ever been delinquent and those held in private-label securities, we find that the share of “in the money” loans with interest rates greater than 5 percent falls to 13 percent of all outstanding mortgages, and 7 percent of UPB.

One final piece of the puzzle is the size of the UPB. Small outstanding balances may not be worth refinancing, as the resulting savings would be low. Figure 3 shows the average UPB of outstanding mortgages by current mortgage rate for those mortgages that have never been delinquent and are not in private pools. Borrowers holding the highest mortgage rate have very low UPB, with an average of about $53,000 outstanding for loans with rates of 7 percent or more.

Without considering credit impairments or investor type, we found a large share of mortgages that appeared to be ripe for refinancing, with 23 percent of outstanding first mortgages having rates above 5 percent. Once removing loans that are currently seriously delinquent, have ever been delinquent, or are in private mortgage pools, the share of mortgages above 5 percent fell to 13 percent. Of this remaining group, average loan balances tended to be small, indicating that while mortgage rates are near historical lows, there may not be many borrowers left who have the incentive or are eligible to refinance.

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