Historically low mortgage rates, with 30-year fixed-rates remaining close to 3.5 percent, maintained refinance activity near a peak level through the end of 2012. The refinance share of applications rose gradually throughout 2012 to end at the highest level of the year at 82.9 percent of all applications in December. Refinance application demand is largely a function of mortgage rates. However, many borrowers in the past few years had incentive to refinance, but were unable to qualify given the lack of equity in their homes.
The Home Affordable Refinance Program (HARP) allowed borrowers with existing loans backed by Fannie Mae or Freddie Mac to refinance regardless of their current loan-to-value ratio, so long as they had been current on their loan over the past year. FHA runs a similar program to help existing FHA borrowers use a streamline refinance to access current market rates. Together, these programs have led to the highest levels of refinancing activity in some of hardest hit markets. The map below shows the magnitude and geographic concentration of increases in refinance application volume for two comparable periods of time and indicates that all states saw cumulative increases in 2012 relative to last year, with the national level of refinance applications rising by 58 percent over the last year. Gains were greatest in Nevada, Arizona, Michigan and Florida which showed increases in refinance volume of 201 percent, 139 percent, 137 percent and 134 percent respectively.
The home purchase market has also improved over the past year. Compared to last year, the average loan size for purchase applications has been higher across all loan types, indicating widespread growth in home prices. Moreover, the pace of purchase applications has been running about 3 percent above the national level last year. Map 2 shows a similar analysis at the state-level for YTD changes for home purchase application volume and indicates that in December 2012, total home purchase application volume is up in 2012 for more than half of the states.
One aspect of the home purchase market that has not received attention is the divergent trends in purchase activity by loan size. As shown in the table below, while purchase application volume has increased on the aggregate, application volume has actually declined for smaller balance loans. Agency jumbo and non-conforming jumbo loans on the other hand, have seen an increase in purchase application volume. Some of this may be due to investor cash purchases of lower priced distressed properties. However, it likely also reflects the impact of tighter credit standards on marginal first-time homebuyers.
Despite the surge in refinance activity in 2012, we expect that refinancing will taper off in the coming months as the economy continues to recover and rates increase. Purchase applications however, will continue to increase slowly in 2013 as home price appreciation improves and home sales gather pace.
