The 0.5 percent cut in FHA insurance premiums that went into effect on January 26^th has been in place for nearly four months now. And page 11 of our May chartbook brings some very good news about how effective that cut has been in stimulating refinance activity.  FHA refinance activity has more than doubled since the premium cut, which can mean only one thing:  it is working.

The “Percent Refi at Issuance” chart on page 11 tracks the refinance share of mortgage-backed securities (MBS) issued by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, as well as those issued by Ginnie Mae, which securitizes FHA-insured loans. Looking at Ginnie Mae securitization data, we see three indications that FHA refinance activity has spiked recently:

FHA’s refinance share is up significantly since January. 39 percent of Ginnie Mae MBS were backed by refinance mortgages in January 2015. By March this number had increased to 50 percent, the highest level in nearly two years and not far below the post-crisis peak of 58 percent set in early 2013, when mortgage rates were near all-time lows. Because it typically takes 1-to-2 months after origination to securitize a mortgage, March Ginnie MBS issuances likely represent FHA mortgages originated in Feb or early March, exactly when the premium cut went into effect.

Number of refinances and dollar volume are both up sharply. Roughly $7.3 billion of FHA refinance originations – the highest level since July 2013 – were securitized in March 2015. By comparison, the average monthly refinance volume during 2014 was roughly $2.5 billion, one third of the March 2015 volume. The number of FHA borrowers who have refinanced is also up sharply, exceeding 34,000 in March. Once again, this is the highest level in 20 months and is more than double the 16,000 average number of refinances per month for 2014.

GSE mortgages are not experiencing the same dramatic spike in refinancing. Could this spike in FHA refis be simply the result of a generally favorable interest rate environment that is causing borrowers everywhere to refinance their mortgages? We don’t think so. While GSE refi activity is also up, the spike has not been as dramatic as FHA.

The GSE refi share increased from roughly 57 percent in January 2015 to 66 percent in April – an increase of 9 percentage points. However, this increase lags the nearly 12 percentage point rise in FHA’s refi share – from 39 to 51 percent – during the same period. To put this in historical context, the current 66 percent refi share of GSE mortgages is 19 percentage points below its post-crisis peak of 85 percent set in early 2013. In contrast, current 51 percent refi share of FHA mortgages is just 7 percentage points below its post-crisis peak of 58 percent. Greater increase in the refi share of FHA mortgages strongly suggests that there is more to rising FHA refinance volumes than just low rates.

Today’s base FHA mortgage rate of 3.7 percent is about 40 basis points higher than the all-time low FHA rate of 3.3 percent set in May 2013. On the other hand, current FHA premiums are 50 basis points lower. This means the January 2015 premium cut has effectively pushed the “all in” FHA borrowing cost to below the level of May 2013. No wonder early refinance volumes are up sharply. It must be noted however, that future refi volumes could rise or fall easily depending, largely, on what happens to mortgage rates. In the meantime, there is no denying the fact that borrowers have responded forcefully to FHA’s premium cut.