Having peaked last November at 5534.5, the refinance index reported by the Mortgage Bankers Association of America is now down to 1556.2, leaving some originators scrambling to find other types of business.
The drop in refinance activity occurred as the average 30-year fixed rate announced by Freddie Mac has risen from a recent low of 6.45 percent to 6.89 percent last week.
Within about a year of the 1993 refinance boom — when the 30-year fell to 6.83 percent — the 30-year climbed to more than nine percent.
At the same time, subprime mortgage originations jumped. According to HUD, the subprime share of the overall mortgage market went from $20 billion in 1993 to $150 billion by 1998.
Could the currently fading refinance market mean that we are headed into a subprime mortgage boom again?
Ratings agency Moody’s Investor Service recently reported that home equity securitizations — which include subprime mortgage loans — were $97 billion during 2001, 63 percent more than the prior year.
Moody’s expects home equity securitizations to reach $105 billion this year. Moody’s said the top issuers of subprime mortgage-backed securities during 2001 were RFC (13 percent), Option One (10 percent) and Chase (7 percent).
Securitizations only represent part of the overall subprime market, with some lenders holding these loans in their portfolios.
Because mortgage rates are expected to head even higher by the end of this year, further declines in refinance activity may provide even more fuel for a subprime resurgence.
So who are today’s subprime players? The following companies were ranked by MortgageStats.com based on their subprime volume during the 4th quarter of last year.
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Rank / Company
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Subprime Volume 4th quarter 2001
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$4.8 billion
$3.1 billion $2.6 billion $2.4 billion $2.4 billion $2.0 billion $2.0 billion $2.0 billion $1.8 billion $1.1 billion |
Subprime mortgage borrowers have largely been untested in times of recession. However, the FDIC reported in February that the incidence of significant repayment difficulties among subprime mortgage borrowers is increasing.
Moody’s says that securitizations in 2000 and 2001 are performing worse than earlier securitizations, likely due to relaxed underwriting standards due to lower profitability.
Lenders like Countrywide, however, are taking a cautious approach to the growth in their subprime divisions.
Debbie Rosen, executive vice president of wholesale subprime lending at Countrywide, noted that they do not want growth for the sake of growth. She said that Countrywide is committed to growing that market prudently but is not looking for extraordinary growth.
While some mortgage originators may be pressed to find their future business in subprime lending, Moody’s senior analyst Henry J. Engelken says that things may change by the end of the year for subprime MBS issuers.
Engelken noted that as the Fed decreased the discount rate by 475 basis points last year, the one-month LIBOR followed suit. As a result, adjustable rate subprime issuers have seen there excess spreads improve by 350-400 BPS.
Engelken noted that if rates rise as expected by the end of the year, subprime spreads (and profitability) will drop, leaving issuers pressed to get their securitizations locked in before their spreads dissipate later this year.
