Moody's: Lower Refi Volume Potentially Leading to More Purchase Loans

Lower mortgage refi volume could lead to a higher proportion of purchase loans in new jumbo residential mortgage-backed securities (RMBS), boosting the credit quality of the pools because purchase loans typically have lower default rates, according to “Slowdown in Mortgage Refinancing is Credit Positive for New Jumbo RMBS,” a new report from Moody’s Investors Service. “Rising interest rates have caused a drastic drop in mortgage refinancing applications since mid-2013,” said Moody’s VP and Senior Analyst Peter McNally. “This number will continue to fall as interest rates rise.” Purchase loans borrowers, who tend to have stronger credit profiles, could constitute a larger proportion of jumbo RMBS pools as refinancing volume falls, a credit positive for pool performance. “Originators generally perform a more in-depth credit review of purchase borrowers because it is their first loan review, whereas borrowers who are refinancing may receive less scrutiny,” said McNally. McNally adds that the absence of cash-out borrowers also contributes to the stronger performance of purchase loans. “The fact that these borrowers have taken equity out of their homes for a mortgage refinancing loan shows that they need cash, which could contribute to the higher default rates of refinance loans.”