Housing Bubble

Retention Rates increase during refinance boom

March 10, 2003

MILWAUKEE, /PRNewswire-FirstCall/ -- MGIC Investor Services Corporation , an affiliate of Mortgage Guaranty Insurance Corporation (MGIC), announced findings from its 2002 prepayment and retention analysis showing that over the first 11 months of 2002, mortgage lenders managed to keep just one of every five customers who refinanced during the heaviest refinancing boom in history.

MGIC's analysis showed that lenders' customer retention rates, which measure the percentage of customers who get their next home loan with the same lender, improved from 21.6 percent in November of 2001 to 24.5 percent as of November of 2002.

MGIC twice annually reports on prepayment and retention trends using data from MGIC's Lender Landscape, a web-based mortgage data service that contains over 11 million residential loans, or approximately 25 percent of the residential loans outstanding nationwide.

"Typically, in periods of high-refinancing, customer retention rates will increase into the 25 percent range as we saw again last year and in 2001," said Mark E. Marple, Vice President - Mortgage Banking Strategies. "The record $2.5 trillion origination market, 60% of which were refinances, caused stress on the loan processing infrastructure of all servicers. Servicers are increasingly concentrating their efforts to win back previous customers and retain existing customers -- and we are seeing signs of success. For example, when comparing the retail channel to other channels of business, we find that retention rates are nearly 40 percent higher."

Previous analyses from MGIC have shown the majority of loans retained by the same lender occur within 90 days of prepayment. The average 30-year fixed-rate mortgage rate declined over 100 basis points in 2002, with December being the low point.

                    10/01   11/01   12/01    1/02    2/02   3/02    4/02
  CPR %              26.9    31.8    26.2    22.1    22.2   24.1    21.8
  Retention %        25.8    21.6    18.9    19.1    19.8   15.5    15.3
  FHLMC Wkly Rate
   (30 Yr FRM)       6.62    6.66    7.07    7.00    6.84   7.07    6.99


                  5/02    6/02    7/02   8/02   9/02   10/02  11/02   12/02
  CPR %           21.4    19.1    24.1   27.8   31.0    39.8   36.9    35.1
  Retention %     17.1    16.0    19.0   20.0   22.2    23.3   24.5     n/a
  FHLMC Wkly Rate
  (30 Yr FRM)     6.81    6.65    6.49   6.29   6.09    6.12   6.05    6.05

"Even though retention rates didn't hit 25 percent as they did during past periods of heavy refinancing until the fourth quarter, the correlation between CPR (constant prepayment rate) and retention remained strong," Marple said. "As the CPR rises, so do retention rates; and as the CPR falls, retention rates also fall. This is likely because historically, many lenders implement portfolio retention programs as a defensive measure when rates are falling."

Consumers Still Cashing In

MGIC conducted an in-depth analysis of approximately 1.1 million loans that prepaid and were retained by the same lender as of the end of November 2002. The analysis confirmed that consumers were still cashing in home equity while lowering both their interest rate and monthly payment. The retention rate for this period was 23 percent.

The average balance of the new loans was $197,000, or 12 percent higher than the prepaid loan held previously by the borrower, according to the MGIC analysis. The average monthly payment on the new loans was $1,275, or 2 percent less than before; and the effective interest rate on the new loan was, on average, 1.17 percent lower than the rate on the old loan.

"Many homeowners in 2002 not only refinanced to lock in record low rates, but many also tapped into the home equity they built up over the last several years of rapid home price growth," said Andy Peterson, Director - Mortgage Banking Strategies. "Many also took advantage of the steep yield curve to jump into ARMs carrying extremely low initial rates, or to shorten their amortization term by selecting a 15 year loan."

                                              New Loan
  Old Loan                     ARM           15 Year FRM        30 Year FRM
  ARM                          59%               16%                25%
  15 Year FRM                   6%               80%                14%
  30 Year FRM                   9%               33%                58%

Roughly 95 percent of conventional loan borrowers stayed with a conventional loan upon refinancing. Only 45 percent of FHA borrowers stayed with an FHA-backed loan upon refinancing.

Source: MGIC Investor Services Corporation