The prepayment fee hits a 16-year excessive because the variety of severe arrears will increase

As interest rates fell in July, prepayments rose to the highest monthly interest rate since 2004.

Prepayment activity in July reached 2.73% compared to 2.65% in June, almost double that of the previous year [1.43%].

"Record-low mortgage rates have fueled strong volume in the refinance market and increased the purchasing power of potential homebuyers, both of which contributed to the 16-year high in prepayment activity this month," said Andy Walden, economist and director of market research for Black Knight in a statement to NMN.

Looking ahead, according to Walden, prepayment activity should move in parallel with mortgage rates.

"While interest rates are still near-record low today, putting strong upward pressure on prepayment speeds, we will face headwinds towards the end of 2020 from the seasonal slowdown in home sales," he said. "We will also look for any signs of the possible impact of the recent 50 basis point fee on the origins of the GSE refinancing, although that remains to be seen," added Walden.

On the other side of the spectrum, mortgage outstanding data was both good and bad news. The crime rate – which does not include foreclosure loans – fell from 7.59% in June to 6.91%, but it is almost double the 3.46% in July 2019.

Fatal borrowers – those 90 days or more delayed but not yet in foreclosure – continued to grow significantly in July. Serious crime properties rose to 2.25 million from 1.87 million in June, and 444,000 year over year. While the general arrears continue to decrease as the economy reopens, many borrowers still face financial hardship and will miss payments.

Loans that were at least 30 days late or foreclosed by the end of July fell from 4.23 million in June to 3.88 million, but rose from 2.07 million a year.

The foreclosure inventory declined to 190,000 from 192,000 in June and 258,000 last year, the lowest since Black Knight began collecting this metric in 2000. The foreclosure advance sales rate was 0.36% month-over-month, down from 0.49% year-on-year back.

However, foreclosure is rising again as taxes and homeowner fees are not under moratorium. The total number of foreclosures rose to 9,900 from 5,900 in June, down from 39,200 a year ago.

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