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Boom in Refinancing Boosts Mortgage Lending

The mortgage market had one of its most significant quarters since the financial crisis as falling rates prompted a flurry of refinancing and an uptick in purchases.

The 30-year mortgage rate unexpectedly dropped to below 4% in May and has remained near its lowest level in three years, opening a window for borrowers who bought at higher rates to lower their payments and for purchasers to jump in.

With the Federal Reserve expected to lower short-term rates this week and the yield on the longer-term 10-year Treasury yield lingering just above 2%, the period of low rates stands to continue.

Falling rates are welcome news for lenders, but they mask a housing market that by some measures is cooling and remains vulnerable to a sudden updraft in rates. What’s more, home prices have continued to rise at a faster pace than median incomes, putting homeownership out of reach for more Americans.

Lenders made $565 billion of mortgage loans in the second quarter, the most in more than two years. At that pace, originations could exceed $2 trillion for only the third year since the financial crisis, according to Inside Mortgage Finance.

Banks including JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. -0.26% all reported higher mortgage originations.

There was also a lift for smaller independent lenders that have expanded their market share in recent years by shifting toward refinancing. They had struggled last year as rates rose, crimping the refinancing market.

“They are getting at least one bottle of Champagne out, if not the whole case,” said Guy Cecala, chief executive at Inside Mortgage Finance, an industry research group.

The last time mortgage originations passed $2 trillion was in 2016, when benchmark Treasury yields hit record lows. A similar boost occurred in 2012, a year in which rates hit what were record lows.

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Refinancing accounted for roughly half of new mortgages, according to Mr. Cecala’s estimates, a boost from recent periods. In 2018, for example, when rates were rising, refinances accounted for just 31% of mortgage business. A one-point change in a mortgage rate can add—or subtract—hundreds of dollars from monthly payments.

Black Knight Inc., a mortgage-data and technology firm, recently estimated that there are 8.2 million U.S. homeowners who would qualify for and benefit from a refinancing. That is a 6.3 million increase from when rates peaked in November 2018.

Refinance applications rose 43% in the second quarter from a year earlier, while purchase applications climbed 6.2% during that period, according to the Mortgage Bankers Association.

John Hastings, a loan officer at Movement Mortgage in Minneapolis, saw a significant number of refinancings of Federal Housing Administration mortgages, which typically go to first-time homeowners. Some wanted to get lower rates, while others wanted to get out of the insurance that is required on those loans. He also saw more purchase business.

“Volume overall is definitely up from last year, that’s for sure,” Mr. Hastings said.

Since the financial crisis, mortgage lending has shifted away from the big banks and toward independent lenders, many with smaller balance sheets. Those firms, whose businesses are typically more dependent on refinancings, struggled last year and early this year as rates rose. A result was a wave of mergers and job cuts, as well as a handful of bankruptcies.

That trend reversed as rates fell. Quicken Loans, the largest nonbank mortgage lender, had its best quarter in its 34-year history from April to June. The company said that it closed $32 billion in mortgages.

The broad housing market is still showing signs of cooling as high home values price many out of the market. But the window of lower rates did provide an opening for some who had been wanting to buy.

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Laura Poole, a database developer at an information technology company, began looking for a home earlier this year to benefit from rising housing values in the Dallas-Fort Worth area, where she lives. She closed on a three-bedroom, two-bathroom brick house in suburban Saginaw, Texas, in May.

Ms. Poole ended up with a rate of 4% on a 30-year fixed mortgage from Better.com, an online mortgage startup. Lower rates helped her have confidence that she would be able to stay within her budget, she said.

“I was so scared of being in a situation where I took on this house and then right away was having money worries,” Ms. Poole said. “So for me my biggest focus when purchasing a house was the projected monthly payment.”

Vishal Garg, founder and chief executive at Better.com, said the company made about $1 billion worth of loans in the second quarter, more than in all of 2016 and 2017 combined.

A Fed rate cut could spur renewed interest in home loans whose rates rise and fall with short-term rates.

In a typical adjustable-rate mortgage, borrowers pay a fixed rate for five, seven or 10 years, which is typically lower than the rate on a 30-year fixed-rate mortgage. After that, their rate generally resets.

Banks often favor these mortgages for high-dollar home loans made to wealthier borrowers. They were popular before the financial crisis but have mostly failed to regain popularity since.

Home-equity loans and lines of credit, which are also tied to short-term rates, may also increase in popularity if short-term rates fall.

“We do expect to see some uptick next month, assuming that there is a change in rates,” said Jon Giles, who oversees home equity products at TD Bank.

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