The number of residential mortgages refinanced in California jumped in the second half of 2019. 138,300 mortgages were refinanced in Q4 2019, well above the 39,300 mortgage refinances closed one year earlier.

Recently, refinancing was most popular at the end of 2012, when mortgage interest rates were at – what were then – all-time lows. When interest rates rose, refinancing simply made less sense for homeowners. Refinances fell through the end of 2018 alongside rising interest rates. However, interest rates plunged again going into 2020, and refinances responded by rising as expected.

Fixed rate mortgage (FRM) rates continued down in Q1 2020, hitting new historic lows in March as impacts from COVID-19 sent markets spiraling. While refinancing reports are not yet in for Q1 2020, expect to see another big jump for this quarter.

Q4 2019’s low mortgage interest rates were held down by cautious bond market investors and the Federal Reserve (the Fed) holding benchmark rates steady. In contrast, Q1 2020’s even lower interest rates are stimulated by the Fed’s actions to send their benchmark rate down to zero as bond market investors dive toward the safety of the 10-year Treasury Note rate, pulling this key rate down to historic lows.

As today’s economic trifecta of pandemic, market crash and recession grips homeowners, real estate professionals will find some relief driven by low interest rates. Be sure to mention the huge savings potential of refinancing at today’s low rates to your homeowner clients.

Updated March 21, 2020. Original copy released July 2014.

Chart update 03/21/20

Q4 2019 Q3 2019 Q4 2018
Refinance loan count 138,300 133,500 39,300
Refinance loan amount
$55.6 billion
$55.2 billion
$14.7 billion

Average 30-year FRM rate

3.71% 3.76% 4.66%

Refinancing begins trending downward

Refinances made up 66% of the 311,000 mortgage originations in Q4 2019, with purchases making up nearly all the difference. This share is higher than the previous quarter, as mortgage originations plateaued in mid-2019 and falling interest rates have attracted a higher number of refinances.

The single largest influence on the increasing trend in refinancing over the past 12 months has been the decrease in mortgage rates in 2019.

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. Thus, the long-term outlook is one of steadily rising rates. However, the Federal Reserve (the Fed) began to drop rates in 2019 in preparation for the next recession, expected in 2020. A struggling economy will keep interest rates low for at least the next two-to-three years before they resume their upward march. Therefore, expect refinances to continue to rise in 2020, in tandem with lower interest rates.

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 2014. However, as rates continue to rise in 2018 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.

Still, 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).

Where’s the profit going to come from?

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 long-term rising rates, they are somewhat counteracted by the decrease in mortgage delinquencies. The rate of mortgages 90+ days delinquent is nearly negligible in California, at less than 1%. 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%.

Mortgage delinquencies have now passed their bottom, with a full recovery of all jobs lost in the 2008 recession in 2020. Looking ahead through the end of 2020 and into 2021, expect mortgage delinquencies to rise with unemployment numbers. The significance of these delinquencies will be up to the government, which is weighing various options at the time of this writing to rescue homeowners from going delinquent and being foreclosed upon during the COVID-19 crisis.

Getting used to lower mortgage profits

Our message to MLOs is this: lower earnings will continue over the next two decades or so, with short reprieves when interest rates decline in tandem with recessionary activity. A shift in the housing market has occurred. Reduced buyer purchasing power equals stunted home sales volume and thus prices. But in the short-term as rates decline heading into the next recession, refinances will become more popular in 2020-2021, giving MLO licensees a momentary buffer.

The long-term outlook is not all dreary. 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.