According to Optimal Blue’s recently released Originations Market Monitor report, the ebb of mortgage interest rates has provided a welcome boon to the still-flagging refinance sector.

“Mortgage rates continued to fall in December, with the Fed delivering welcomed commentary suggesting rates may have peaked with cuts on the horizon in 2024,” recapped Brennan O’Connell, data solutions manager, Optimal Blue. “The sharp drop in rates provided tailwinds that caused rate-and-term refinance volume to rise a notable 43% month over month.”

The gain in rate-and-term refis helped bump the refinance share of total locks up to 19% in December. That’s the highest percentage for refinances since April 2022, even with cash-out volume falling 9% from November.

The growth in rate-and-term refinancing was boosted by what Optimal Blue described as a “material uptick” in VA Interest Rate Reduction Refinance Loans (IRRRLs). December’s IRRRL volume rose to the highest point since January 2022, pushing the total refinance share of VA volume up to almost 30%.

VA volume, consequently, saw December’s highest gain in market share among loan types in Optimal Blue’s data. VA volume grew 137 basis points to end December at 11.8% of total loan volume.

Interestingly, the pick-up in rate-and-term refinancing correlated with borrowers’ average credit scores falling by 8 points to 724 in December. Borrowers with lower credit scores took advantage of receding rates to bring down their monthly payments with VA and FHA refinances. Credit scores for other loan purpose baskets were on the uptick, though, as purchase and cash-out scores increased by 1 and 4 points, respectively.

While the refi market has begun seeing meaningful shifts in reaction to the changing rate environment, falling rates made little consequence on purchase lending, per Optimal Blue data. Lock volume on purchase loans fell 23%, though some of the decrease is attributable to seasonality as December, as O’Connell explained, is “traditionally the slowest month for homebuyer activity.”

 Also notable among the takeaways from the report is the continued dwindling of adjustable-rate mortgage (ARM) market share. The ARM share of locks eroded to 5.2% of total volume, “indicating further fading of consumer interest in the product,” the report said.