The number of residential mortgages refinanced in California fell in the fourth quarter (Q4) of 2016. Over 129,000 mortgages were refinanced in Q4, down from 152,000 in Q3. The number of refinances remains well above the recent trough of 46,000 occurring in Q1 2014.

Recently, refinancing was most popular at the end of 2012, when mortgage rates were at all-time lows. When rates jumped in mid-2013, refinancing simply made less sense for homeowners. However, the decline in mortgage rates experienced from 2014 to late 2016 sparked an up-tick in refinances, with a slight rise in mortgage rates in 2015 causing a temporary drop in the number of refinances at the same time. The current rise in refinances seen in Q3 2016 quickly tapered off due to the mortgage rate shift and will continue to descend in 2017.

Expect refinances to drop as mortgage rates won’t return to the lows of 2012 for many years to come. 2012 was the bottom of a 60-year rate cycle: 30 years of descending mortgage rates, followed by another 30 years of rising mortgage rates. Homeowners with higher mortgage rates who have considered refinancing need to do so now, as rates are not expected to remain at this level beyond 2017.

Updated March 16, 2016. Original copy released July 2014.

Refinances-ratesChart update 03/16/17

Q4 2016 Q3 2016 Q4 2015
Refinance loan count 129,228 151,830 81,343
Refinance loan amount
$45.4 billion
$54.3 billion
$28.2 billion

30-year average FRM rate

3.86% 3.55% 3.86%

Refinancing begins trending downward

Refinances made up 63% of the 776,000 mortgage originations in 2016, with purchases making up the difference. Since Q3 2014, the share of mortgages financing home purchases remains lower than refinances, with refinances making up 65% of the total mortgage originations in Q4 2016, even with Q3. Despite the 14% decrease in the total number of mortgage originations from Q3 to Q4, refinances and purchase-assist mortgages as a percentage of total mortgage originations remain the same.

The recent decrease in the total number of mortgages origination coincides with the recent bump in mortgage rates coupled with low inventory and lackluster home sales volume. There were a total of 200,000 mortgage originations in Q4 2016, down from 232,000 in Q3.

The single largest influence on the upward trend in refinancing up to Q3 2016 was the decrease in mortgage rates. However, mortgage rates have begun to increase and are slated to rise notably in 2017.

Be sure to mention this fact to homeowner clients hesitant about refinancing today. They are likely unaware that mortgage rates have begun to rise. Further, if they are thinking about refinancing, it’s better they do it today than later this year when rates edge higher.

MLOs get nervous

The number of California mortgage loan originators (MLOs) have steadily risen each quarter since the first quarter (Q1) of 2012. State-licensed MLOs continue to rise, likely due to the availability of work, while federally registered MLOs have remained level since Q1 2014. However, as rates continue to rise in 2017 and mortgage originations diminish, MLOs will undoubtedly find work less often. Thus, the renewal rate for MLOs is expected to likewise decrease, along with newly licensed MLOs.

Further, while refinances have continued to temporarily exceed the number of purchase-assist originations, the overall dollar amount of all originations decreased in Q4 2016, as seen in this nationwide chart from the 2016 Q4 Mortgage Industry Update:

Loans by Purpose by Quarter

MLO-LoansByPurposeSource: Nationwide Mortgage Licensing System (NMLS)

This rise was dampened in 2013 by the home price surge across California and the nation, driven by speculator over-activity. However, at the same time, the dramatic rise in prices led to greater home purchase origination amounts, reflected in the chart above.

As the speculator wave subsides, more activity is being seen from end user homebuyers (those most likely to take out mortgages, as opposed to speculators who are often armed with cash). Thus, as refinances diminish, home purchases will maintain a slow and steady share of new mortgages through 2017.

Where’s the profit going to come from?

Profits increased in Q3 2016 for mortgage originators. In Q3, mortgage originators made an average profit of $1,773 per loan origination, up from $1,686 per loan origination in Q2, according to the Mortgage Bankers Association.

These increased profit margins are a result of the slight drop in mortgage rates experienced since Q4 2015. However, lower bank earnings are expected for the next two-three decades, as banks will attempt to keep mortgage rates appealing while still maintaining a profit.

On the plus side, as bank earnings decline with rising rates, they will be somewhat counteracted by the continuing decrease in mortgage delinquencies. The rate of mortgages 90+ days delinquent was down to 1.2% of all California mortgages, as of Q2 2015. For comparison, the height of delinquencies occurred in 2010 when just over 7% of all mortgages were 90+ days delinquent. The normal share is around 0.5%.

Delinquencies will continue to decrease as the economy fully recovers: first with a full recovery of all jobs lost in the 2008 recession, followed by home sales volume, along with a recovered delinquency rate.

Getting used to lower mortgage profits

Our message to MLOs is this: lower earnings are here to stay. With the rise in mortgage rates, a shift in the housing market will occur. Reduced buyer purchasing power equals stunted home sales volume and thus prices. Refinances will slow to a trickle and MLO licensees will see their numbers dwindle, as only the very successful are able to make a living.

The outlook is not all dreary, though. Preparing now for reduced profits can help your mortgage business survive in the years to come. As profits per loan originated will again begin to decrease, the difference will have to be made up for in a greater volume of loan originations.

Buyers desire better customer service, and many are willing to pay a higher interest rate to get that service, according to a survey by Carlisle and Gallagher Consulting Group. Gaining a word of mouth reputation for superior customer service is one way to ensure you gain the loan volume needed to survive in the coming years.