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TH E M R EP O RT | 17 COVER STORY When ever-30 borrowers and loans held in private securities (not owned by the government and therefore are not eligible for FHFA's Home Affordable Refinance Program) are removed from the pool, the share of "in the money" borrowers with rates higher than 5 percent shrinks to 13 percent (representing only 7 percent of UPB). Further reducing the incentive for high-interest rate borrowers to refinance is the comparatively low UPB for those borrowers. CoreLogic's data shows that the average UPB on loans got lower as rates climbed. Mortgage loans with rates of up to 5 percent aver - aged close to $200,000 in UPB; by comparison, those loans with rates of 7 percent or higher had an average of approximately $53,000 in UPB. "Without considering credit impairments or investor type, we found a large share of mort- gages that appeared to be ripe for refinancing, with 23 percent of outstanding first mortgages having rates above 5 percent," Boesel said. "Once removing loans that are seriously delinquent, have ever been delinquent, or are in private mortgage pools, the share of mort- gages above 5 percent fell to 13 percent. Of this remaining group, average loan balances tended to be small, indicating that while mort- gage rates are near historic lows, there may not be many borrowers left who have the incentive or are eligible to refinance." According to Blackwell, there is a particular cohort of homeowners that will not refinance, no matter what. "Some people, no mat- ter how low interest rates go, it's not something they pay attention to, and they just don't refinance. There's always a segment of the population that's that way. They got their mortgage, and they just don't look at it again and don't care enough to refinance." Aside from that, Blackwell said, another group is either underwater or doesn't have enough of an LTV ratio to refinance; yet another group might believe that the refinancing process is too much work or too difficult; and yet another group might have damaged credit or a lower income than they used to. "All of those populations are getting smaller over time, and I think today what you're seeing is interest rates have just risen to a level where there are fewer people in the money to refinance," Blackwell said. With research indicating that that the refinance market is tapped out, or at the very least close to it, where does the market go from here? The future of the refinance market will largely depend on what mortgage rates do over the next 12 months. What does 2017 Hold for Refinances? M ortgage rates have already begun inching their way back up. By the middle of October, Freddie Mac reported an average 30-year FRM rate of 3.52 percent, the highest in four months—right before the Brexit vote. And a rise in rates will likely mean a corresponding, yet hardly coincidental, drop off in mortgage refinances. "There is going to be some fair amount of sensitivity in the refi- nance side of the market, as we've been saying in the beginning of every year," First American Corp. Chief Economist Mark Fleming said. "If that happens, refis will de- cline. That said, the purchase mar- ket has continued to gain strength. The fact that the refi market might wane, doesn't necessarily mean bad things to the overall market, because the purchase market will continue to strengthen." Fleming is not the only one that expects a stronger purchase market in 2017. According to Bode, "I don't think rates will skyrocket. I think they'll either stay the same or go up just a touch. I think there will be a 10 to 20 percent decline (in originations), and I think it's going to be a function of not as many refinances . . . there may be a 30 percent decline in refinances, but at the same time there may be a 10 percent increase in purchase transactions." Lewis believes that if mortgage rates rise, that HELOCs will replace a lot of the market's refinancing activity, in particular the cash out refi activity currently happening. "With a HELOC, you're not paying money on interest you're not using," Lewis said. "Even as the Fed raises the federal funds rate, I think you'll still see HELOC activity go up, just because mortgage rates supposedly might go up even more." BRIAN HONEA'S writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press. A lifelong Texan, Honea received his master's degree from Amberton University in Garland. "There is going to be some fair amount of sensitivity in the refinance side of the market, as we've been saying in the beginning of every year." — Mark Fleming, Chief Economist, First American Corp.