Mar. 13, 2010 (FreeRateUpdate.com) – Did an epic decline in mortgage refinance applications fly under the radar? What I’m going to tell you in this article suggests just that. I included some hard facts, little talked about information on refi apps, and a chart that will be tough to dispute.

First off, if you’re under the impression the refi market is strong now, based on refi apps, you may want to re-think your position. The Mortgage Bankers’ Association Weekly Application statistics are the leading indicator for refinance activity, yet when comparing two eras, the boom and post boom in particular, statistics are very misleading and here’s why.

The MBA weekly application data is compiled from the largest retail banks. Problem.

The ‘implode’ of most wholesale lenders, and boom to bust brokers for that matter, caused the data when comparing different eras to be very misleading.

The data is compiled from the largest retail lenders.  Following the well documented collapse of almost every boom era wholesale lender big and small, and exit of most big banks out of wholesale lending, retail lenders’ gained a ton of market share. I’m not talking 5 or 10 percent here. A very small percentage of newly originated mortgages come from wholesale lenders via brokers today.

Before the mortgage meltdown, a 2004 study by Wholesale Access Mortgage Research & Consulting, Inc. said 53,000 mortgage brokerages originated 68% of all mortgages while just 32% were originated by retail banks. As wholesale lenders’ sprouted up during 06′ and 07′, wholesale lenders’  market share increased by a lot, likely to at least 80% while retail wained to near 20%.

Since the MBA weekly application survey draws its figures from a small number of big retail lenders’ that have gained a huge portion of market share, while it can be accurate from week to week, month to month, and maybe last year to this year, you just can’t compare one era to another. Matter of fact, due to the huge flip flop in market share (80/20 to 20/80 wholesale to retail) over the past couple years, the data is ridiculously off.

Comparing MBA application data now, which is based on around  80% of all mortgage applications, to 2006, when it was based off maybe 20% of all applications, is very screwed.

Let’s do a real comparison factoring in the wholesale lending and retail lending market share changes. Here’s a chart. Click the chart for a full size version. The bright green and dark green show mortgage applications scaled appropriately to market share at the time.

HOW WE MADE THIS CHART: Since  the original purchase applications chart (red and blue lines) was compiled from just retail lenders, we added the bright green and dark green lines by scaling the original data for market share percentages.  We used real percentages from 2004 to estimate 2006 and 2009 percentages based on the rise and collapse of wholesale lending. The lines were eye balled but it gives an idea of what it looks like when you factor market share in.

Here's mortgage applications, scaled for market share of wholesale/retail lenders compared to the red and blue unscaled data which is very misleading. What looks like what really happened?

That’s just the first reason and it’s a bit of a shocker.

What about the fact that a much smaller percentage of applications actually turn into funded mortgages.  This is major. If you ask mortgage professionals, I think for the most part while keeping a positive attitude they’ll admit maybe 1/3 of what used to go through in the boom era goes through now. Maybe less?

Another factor, and don’t underestimate it, is that borrowers are now rate shoppers. Those “1% sounds great” neg-am borrowers a lot of times filled out just 1 application, and there was a lot of them; hence the neg-am defaults taking place today.  Borrowers are tediously looking for the best 30 year fixed rate. That can mean 3, 4 5 applications per borrower.

Freddie Mac data shows in 1995 total combined volume of cash-out including 2nd mortgage/HELOC consolidation was  just over 27 billion dollars. Volume rose for 12 years, every year but two, and peaked in 2006 at 346.7 billion dollars. Since then Cash-out volume has dropped for 3 consecutive years, to $265.7 billion in 2007, to $121.2 billion in 2008, and then $102.7 billion in 2009. Cash-out refinance volume  is at it’s lowest level since  2000. This despite Freddie also gaining a lot of market share. If anybodies got Freddie Mac market share data I’d love to see it.

ARM to ARM and ARM to Fixed refinances are at a 12 year low. The percentage of homeowners’ refinancing to an ARM in January of this year was just 6%. Compare to 32% in Jan. 2006. We can assume the number of homeowners’ with adjustable rate mortgages is down and declining by the month; therefore, so is the number of homeowners’ refinancing out of them.

So we’ve established it’s likely the current refinance market is hurting much more than we’re made to believe. Cash-out refinance, and adjustable rate mortgage refinance is declining and at the lowest levels in a decade. This despite insanely low mortgage rates.

Equity isn’t gaining and guidelines aren’t loosening; therefore, the number of people who can refinance isn’t increasing.

Now imagine the millions of homeowners’ completely pushed out of the market for a refinance when mortgage rates increase to historically low but more normal levels.

There’s those that doubt a spike in mortgage rates will occur. Long long ago, way back in 2008, the annual average for the 30 year fixed rate was 6.03, down from 6.34 in 2007′ and 2008, 6.41.

Imagine the millions of homeowners pushed out of the refi market if rates move to just these levels, which are considered historically low. We’re not talking a rate increase to even 6.5/7% here, 5.75 to 6.25 would do the trick.You’ve got to think rate and term refi’s will go nearly kaput. That leaves the refi market for the most part relying on cash-out refinances. Until equity in the U.S. grows 20% and that could take years, not many people will be taking out cash to put a pool in the backyard, especially when they’re not lowering their interest rate or possibly looking at a higher rate.

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Author Spotlight : Ed Ferrara

Edward James Ferrara III spent 8 years (2001-2008) brokering and banking home loans in Orange County, CA to the tune of some 500 million dollars in mortgages funded by May of 2008, when he founded the rate research website FreeRateUpdate.com. Ed recently married and became a first time father (Edward James Ferrara IV). Ed also contributes to the Realty Times. To contact Ed, email him or call him at (714) 694-5914.