The number of residential mortgages refinanced in California declined in the fourth quarter (Q4) of 2018.  Just 36,400 mortgages were refinanced in Q4 2018, less than half of the 79,700 refinances closed one year earlier.

Recently, refinancing was most popular at the end of 2012, when mortgage interest rates were at all-time lows. When interest 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 uptick in refinances. This slight increase saw a sharp decline in 2018, due entirely to the rise in interest 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) has signaled they are finished raising rates in 2019, which will keep interest rates low for the next three-to-four years before they resume their upward march. Therefore, expect refinances to rise from their bottom in 2019, in tandem with decreasing interest rates.

Updated March 22, 2019. Original copy released July 2014.

Chart update 03/22/19

Q4 2018 Q3 2018 Q4 2017
Refinance loan count 36,400 43,900 79,700
Refinance loan amount
$18.0 billion
$16.0 billion
$29.0 billion

30-year average FRM rate

4.66% 4.42% 3.83%

Refinancing begins trending downward

Refinances made up 37% of the 98,800 mortgage originations in Q4 2018, with purchases making up nearly all the difference. This share is down from previous quarters, even as the total number of mortgage originations has dropped.

The single largest influence on the downward trend in refinancing in Q4 2018 was the increase in mortgage rates. But the good news for refinancers is that FRM rates have begun to decline in 2019, held down by bond market investors and the Fed’s efforts to hold benchmark rates steady, for now.

Be sure to mention this fact to homeowner clients hesitant about refinancing today. They may be unaware that mortgage rates have fallen back following their steep rise in 2018.

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?

Profits decreased in Q3 2018 for mortgage originators. In Q3 2018, mortgage originators made an average profit of $480 per loan origination, down from the $580 average profit per loan originated a year earlier, according to the Mortgage Bankers Association.

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 will be somewhat counteracted by the continuing 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%.

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 will continue over the next two decades or so, with short reprieves when interest rates decline in tandem with recessionary activity. With the rise in mortgage rates during 2018, 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 2019-2020, 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.