Black Knight: Origination Volume Fell 34% In Q1

Posted by Patrick Barnard on June 05, 2017 No Comments

Mortgage origination volume fell 34% in the first quarter compared with the fourth quarter, driven mainly by a 45% drop in refinances, according to Black Knight Financial Services’ Mortgage Monitor report.

Overall, lenders originated about $372 billion in first-lien mortgages in the first quarter – the lowest volume seen since the fourth quarter of 2014.

Purchase originations fell 21% compared with the fourth quarter but were up 3.0% compared with the first quarter of 2016, according to the report.

Black Knight’s report is in line with an earlier report from ATTOM Data Solutions showing that a little over 1.4 million loans (refinance and purchase loans) were originated in the first quarter – down 30% compared with the fourth quarter and down 21% compared with the first quarter of 2016.

What’s unusual about the drop in refinances is the fact that mortgage rates remained more or less flat during the first quarter, with the average rate for a 30-year, fixed-rate mortgage hovering close to 4%.

Ben Graboske, executive vice president for Black Knight Data & Analytics, says the drop-off in refinances seen in the first quarter stems, in part, from the increase in mortgage rates that came in the fourth quarter. He points out that the same thing more or less occurred at the end of 2013.

“At that point in time, interest rates had [increased] abruptly – very similarly to what we saw at the end of 2016 – and originations slowed considerably,” he says of the fourth quarter of 2013. “The same dynamic is at work here.”

“Likewise, refinance lending among higher-credit-score borrowers, who have largely driven the refinance market these past several years, saw a quarterly decline of 50 percent,” he adds. “As we’ve seen in the past, these borrowers tend to strike quickly and often when interest rate incentives are present but tend to hold back when the conditions are less favorable.

“At the other end of the credit spectrum, lower-credit borrowers – those with credit scores below 700 – only saw refinance volumes decrease by 24 percent,” Graboske adds. “Again, we saw a similar phenomenon when rates rose in late 2013 and early 2014. This is worth noting as we monitor the future performance of 2017 originations. Not only are refinances – which generally tend to outperform purchase mortgages – making up a smaller share of the market, but there’s also been a net lowering of average credit scores, as well. The average [first-quarter] refinance credit score was 742, down from 751 in [the fourth quarter of] 2016 and the lowest average credit score since [the third quarter of] 2014. Both of these factors could have a dampening factor on mortgage performance, holistically speaking.”

Perhaps more alarming for mortgage lenders is that purchase volume in the first quarter came in lower than had been forecast.

“Purchase originations were down 21 percent from the fourth quarter of 2016, although the first quarter is historically the calendar-year low for such lending,” Graboske says. “Purchase lending was up year over year, but the three percent annual growth is a marked decline from the fourth quarter of 2016, when it was 12 percent, and marks the slowest growth rate Black Knight has observed in more than three years – going back to the fourth quarter of 2013.”

Another factor causing the recent decrease in originations is home prices, which have, as of the end of April, risen for more than 59 consecutive months. According to the report, home prices rose another 1.3% in March compared with February – the largest monthly increase in nearly four years. In fact, in many areas of the country, home prices have surpassed their pre-crisis peaks.

Rising home prices, in turn, have impacted affordability. At the prevailing 30-year conforming mortgage rate (4.02% as of May 18), it currently requires 22.6% of the median income to make the monthly principal and interest payment on a median-priced home.

Black Knight notes, however, that although affordability is being stressed – in some geographical areas more so than others – it remains far below the peak of 35% of income required in 2006 and is still not quite at the pre-crisis average of 26.7% seen from 2000 to 2005.

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