AI could speed mortgage refinancing and pressure bond returns
Morgan Stanley estimates the share of eligible homeowners who refinance could rise from about one-third to as much as 60%.
Artificial intelligence could allow homeowners to refinance mortgages much faster, potentially reducing returns for investors in the $9 trillion mortgage-bond market.
Only about one-third of homeowners who could save substantial amounts by refinancing do so, according to Morgan Stanley research. Lenders say AI can reduce the time and paperwork that discourage eligible borrowers.
Rocket Mortgage says borrowers can move from application to rate lock in about 30 minutes and aims to cut that time to 10 minutes. United Wholesale Mortgage cites initial approvals in as little as 15 minutes, while Better.com says it can complete the process in two minutes.
Morgan Stanley strategists estimate that faster approvals could lift the share of eligible homeowners who refinance to about 60%. That would shorten the life of higher-rate mortgages backing bonds and force investors to reinvest sooner at prevailing rates.
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The analysts said mortgage loans could become more expensive if investors demand an additional one or two tenths of a percentage point in interest. Mortgage-backed securities could also trade more like callable bonds.
Regulations still require licensed human participation and closing formalities can add time. Labor accounts for about two-thirds of mortgage-origination costs, according to the analysts. Rocket has invested more than $500 million in AI, automation and related technology over six years.