The number of residential mortgages refinanced in California skyrocketed in 2020. In total, over 1.1 million mortgages were refinanced in 2020, over twice as many as the 416,000 mortgage refinances closed in 2019. At the end of 2020, refinances made up a whopping 79% of all mortgage originations.

Prior to 2020’s refinance boom, refinancing was last most popular at the end of 2012, when mortgage interest rates were at – what were then – all-time lows. When interest rates rose in the years that followed, refinancing simply made less sense for homeowners. Then, when interest rates plunged to new historic lows going into 2020, refinances responded by rising rapidly as expected.

While state-level refinance numbers are not yet available for 2021, fixed rate mortgage (FRM) interest rates rose slightly in the first half of 2021, to fall back in Q3 2021. Thus, refinance reports are expected to show a continued inverse relationship to interest rates in 2021. While the peak for refinancing is now behind us, expect refinancing to continue to make up an oversized market share of mortgage originations in 2021 and 2022, reflective of fewer home sales and the continued attractiveness of relatively low interest rates.

As today’s homebuyers seek to benefit from the extended buyer purchasing power offered by low interest rates, low inventory has kept many from buying successfully. But homeowners who plan on remaining in their home for several years still have the opportunity to take advantage of refinancing now, as interest rates will only rise in 2022-2023.

Updated November 23, 2021. Original copy released July 2014.

Chart update 11/23/21

Q4 2020 Q3 2020 Q4 2019
Refinance loan count 367,400 342,800 152,200
Refinance loan amount
$161 billion
$146 billion
$106 billion

Average 30-year FRM rate

2.76% 2.94% 3.71%

Refinancing has buoyed the mortgage industry

Refinances made up a whopping 79% of the 467,500 mortgage originations in Q4 2020, with purchases making up nearly all the difference. This high share continues to break records, as mortgage purchase originations have dropped since Q4 2019 and plummeting interest rates have attracted a higher number of refinances.

The single largest influence on the recent refinance revolution has been the historic decrease in mortgage rates.

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, which officially began in February 2020. The Fed has signaled they intend to keep interest rates relatively low through 2023, though interest rates have already begun to inch higher heading into 2022. Therefore, expect refinances to continue to make up a large share of mortgage originations in 2022, though sheer numbers will fall back from the peak experienced in 2020.

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.

Low earnings will be further complicated by rising mortgage delinquencies. Nationally, the foreclosure moratorium and forbearance programs have kept millions of homeowners in their homes without making mortgage payments. While in forbearance, the mortgage servicer agrees to temporary halt the foreclosure process while the homeowner attempts to bring the mortgage current.

However, the foreclosure moratorium recently ended in July 2021, and as many exit forbearance heading into 2022, these mortgages will be fair game for lenders. A influx of forced sales are expected in 2022, adding to inventory.

Related article:

Rising 90+ day mortgage delinquencies are the foreclosure shadow inventory

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.