Why refis are driving mortgages amid COVID-19

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Photo by CACTUS Creative Studio/Stocksy

Despite the economic challenges brought to the forefront by the COVID-19 crisis, community bankers say mortgage origination activity has remained strong through refinances thanks to low interest rates and customers working from home.

By Beth Mattson-Teig

Residential mortgage lending has remained remarkably strong following the COVID-19 economic crisis despite unemployment, furloughs or reduced income affecting many Americans. “Everyone thought the origination business would shut down, and it really hasn’t,” says Ron Haynie, ICBA’s senior vice president of mortgage finance policy. “Actually, it has been quite the opposite.”

Single-family mortgage originations are forecast to hit $3 trillion this year, a 30% increase compared with 2019, according to a June Fannie Mae forecast. Although demand is strong across the board as people take advantage of incredibly low interest rates, there has been a notable pop in refi activity. According to Fannie Mae, refinances are expected to account for 59% of total mortgage origination volume this year as compared with 44% in 2019.

There has been a big change between purchases and refinance,” says Brian DuMond, president and CEO of $530 million-asset Geddes Federal Savings & Loan Association in Syracuse, N.Y. Last year, about one-quarter of the community bank’s mortgage originations came from refinances. Through the first half of 2020, the bank has seen refinances account for well over half of mortgage activity. New home purchases represent about one-third of total mortgage activity, with home equity loans and lines of credit making up the remaining balance.

Steady momentum ahead for refis

Many expect refi activity to remain strong through the end of 2020. “I think it will be sustainable, because I don’t think the strengthening of the economy will translate into materially higher mortgage rates,” Haynie says.

The recovery also could improve eligibility for some applicants who were negatively affected in terms of employment or income during the COVID-19 shutdown. In addition, the Federal Housing Finance Agency announced in May that it was putting new rules in place that would make it easier for homeowners who entered into COVID-19-related forbearance on mortgages backed by Fannie Mae and Freddie Mac to refinance loans after the forbearance period ends. “That’s a big change, and that will also help to keep that momentum going,” Haynie says.

At the same time, demand is being fueled by a variety of factors. Those working from home due to COVID-19 may turn to a refinance as an option to lower their monthly payment or pull equity out of their homes. Another by-product of work-at-home orders is that more people want to make changes or reinvest in their current homes, which is going to continue to drive demand for refinancing. Low rates are also helping drive strong home purchase activity from both millennials as first-time buyers and older homeowners looking to downsize.

“I anticipate business will be good in the second half of the year, but a lot of it will depend on the reopening and how quickly the economy comes back.”
—Sharon Geib, Cadence Bank

“Like most mortgage lenders, our volume is up over the prior year, which is largely due to the increase in refinances,” says Sharon Geib, executive vice president and president of the mortgage division at $18.9 billion-asset Cadence Bank in Atlanta. Geib expects that refi activity to continue into the fall as borrowers continue to take advantage of the low rates. “That is a good thing for the economy as it will help borrowers to lower their mortgage payment, which will help put money back into the borrower’s pocket,” she adds.

In addition, some bankers expect to see pent-up demand driving homebuying as states reopen. Typically, spring and summer are the busiest times of year for new home sales. Some of that homebuying was disrupted by stay-at-home orders. “I anticipate business will be good in the second half of the year,” Geib says, “but a lot of it will depend on the reopening and how quickly the economy comes back.”

Hedging against risks

Despite robust demand, banks are proceeding cautiously to make sure they are making good loans. Community banks that hold those mortgages in their own portfolios are also mindful of how the loans they are making today at historically low rates can potentially affect their balance sheets going forward. Banks still have a fairly good spread between their cost of funds and the mortgage rate that the borrower pays, Haynie says. The downside is that as rates go up, that margin will get squeezed.

Banks are more adept at hedging mortgage lending risk, and that risk is something community banks continue to monitor carefully. “When you are in a low-rate environment, that is a huge deal for us because we do hold onto our loans,” DuMond says. “So, when the rates go up—and they will—deposits reprice quicker than our mortgage portfolio.”

As a result, Geddes Federal Savings & Loan Association runs frequent models to fully understand the risks when putting new mortgage loans on the books.

In the current rate environment, the community bank tends to originate fewer 30-year, 25-year and 20-year loans and makes more 15-year and/or shorter loans. It has also put in place a biweekly product that allows mortgages to pay off quicker.

“When you portfolio loans and those rates go up, the lower rate loans are going to stay there while the deposits are going up at a faster pace,” DuMond says. “That is a big concern, and we do limit the longer term mortgages right now because of that.”

Beth Mattson-Teig is a writer in Minnesota.