Mortgage Prepayment Rates Hit 7-Year High

By Stevie Duffin Updated on 12/14/2012

By Daniel Duffield

Prepayment rates for mortgages have drastically increased, hitting the highest measurement since 2005 as homeowners capitalize on the incredibly low costs for refinance.

According to Lender Processing Services Inc. (LPS), a Jacksonville, Florida-based data provider which keeps record of 40 million mortgages, home loan repayment in August reached a rate which would eliminate a quarter of the debt within a year.

Last week, the rates for 30-year fixed rate mortgages declined to 3.4%, furthering the refinance application increases, following the Federal Reserve’s announcement of the QE3, a plan to purchase $40 billion of mortgage backed securities monthly in an effort to rejuvenate the economy. This measure comes after previous government efforts to stimulate refinance rates with new policies which would widen the range of eligibility and lessen the associated costs.

Herb Blecher, senior vice president for LPS Applied Analytics, stated in an interview that these measures have created much opportunity for homeowners hoping to refinances, as the current interest rate trends have been advantageous even for borrowers who recently refinanced into a new mortgage.

Prepayment rates also echo with borrower defaults and debt discharged through home sales, which rose in August, reaching a two-year high amidst signs of upturn in the housing market.

Last week, refinance applications soared nearly 20%, hitting the highest rate since April 2009, putting the average pace of increase at 56% higher than 2011, according to an index from the Mortgage Bankers Association released today.

Re-Refinancing

For a typical 30-year fixed-rate loan, costs associating with borrowing have decreased from last year’s recorded high of 5.05%, according to a survey from Freddie Mac. As a result, repeat refinance activity has surged. Prepayment rates in August increased the most among loans originated last year, rising 23% as shown by LPS data.

Investors of mortgage bonds oversee prepayment rates as they control their returns. When buying debt for more than 100 cents on the dollar, bondholders accept a risk of losses, as this value can be diminished by homeowners securing a new mortgage too hastily in efforts to repay the existing mortgage. With the trading of debt below face value, returns show growth proportionate to repayment rate increases.

For underwater borrowers, loan prepayment has increased the quickest, rising 65% for homeowners owing 20% or more than the worth of their property, according to the LPS.

President Barack Obama’s administration has aided these gains in refinancing through the relaxed qualifications for conventional loans, making it much easier for borrowers with mortgages owned by Fannie Mae and Freddie Mac to qualify for a refinance without home equity. This has been enacted through a cost reduction for homeowners holding older loans insured by the Federal Housing Administration (FHA).

Purchases of previously owned homes rose 7.8% in August, reaching a 4.82 million annual rate, the highest since May 2010, according to a statement on Sept. 19 from the National Association of Realtors.