Interest rate climate pushes popularity for alternative loan products

Black Knight: Rate-lock dollar volume shows modest increase from January to February

With interest rates resuming their upward climb, consumer interest in alternative products such as jumbo loans and adjustable-rate mortgages (ARMs) saw higher demand in February, Black Knight reported.

The company reported that rate-lock dollar volumes rose 2% from January to February even as the number of locks declined. Lenders shifted production toward jumbo products that exceed conforming loan limits.

Interest rates on 30-year conforming loans averaged 6.68% at the end of February, up 52 basis points from a month earlier. Rates for jumbo loans, meanwhile, increased by only 7 basis points during this time to reach an average of 6.43%. Additionally, the ARM share of mortgage rate locks jumped back above 10% last month.

“As rates resumed their upward trajectory in February, borrowers responded predictably, moving toward more rate-favorable offerings,” said Kevin McMahon, president of Black Knight division Optimal Blue.

“That included a shift to jumbos, ARMs and other nonconforming products in the month. With refinance activity basically at a floor, all eyes are on the purchase market. And yet such lock volumes remain more than 40% down from last year’s level, with the triple-threat of rate, affordability and inventory challenges still looming large for the foreseeable future.”

All types of nonconforming loans, include jumbos and other products with expanded guidelines, grew to 12.2% of all rate locks in February. Conforming loans, as well as Federal Housing Administration and U.S. Department of Veterans Affairs products, lost share during the month.

Dollar volumes for purchase loan locks grew by 4% during the month, but the number of purchase loan locks remain low by recent historical standards. They were down 42% on a year-over-year basis and were 35% below pre-pandemic levels of February 2020. The average purchase loan size rose to $349,000 (up $9,000 from January).

The refinance share of the market returned to 14%, matching the low point of the current cycle first reached in October 2022. Cash-out refi locks fell by 11% from January to February due to the spike in interest rates.

The average rate for a 30-year fixed mortgage briefly dropped below 6% early in February, the first time that had occurred since September 2022, Black Knight reported. But even as borrower demand returned as that threshold was reached, it retreated just as quickly as rates climbed back above 6.5%.


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