Unwillingness to Refi or Sell Despite High Equity


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The amount of equity available for tapping by
homeowners hit a new recent high in February.  Meanwhile, mortgage prepayment rates (how quickly owners are refinancing or selling) fell to the lowest levels since early 2014.  Black Knight’s Mortgage Monitor, which focuses on details of mortgage performance
during the months, looked at these two aspects of that performance as well as
updating hurricane related delinquencies four and five months after Harvey and
Irma wreaked havoc in Texas and Florida.

Loan prepayments or the SMM (Single Month Mortality)
rate hit a four-year low during the month. 
In fact, only three months over the last 15 years have had a lower rate
of paydowns and payoffs, September and November 2008, just as the housing downturn
was reaching crisis levels, and February 2014, a period with interest rates and
a seasonal environment similar to this past February.

This time it was a spike in interest rates that
served to reduce the SMM.  Prepayments
are strongly correlated with refinancing rates, and in the first two months of
the year the number of potential refinancing candidates has declined by more
than 40 percent. The refinanceable pool, the term used by Black Knight to
describe the number of homeowners with both the incentive and the ability to
refinance is now the smallest since late 2008 and, the company says, it is no
surprise that prepayments are among the lowest since that time period as well.

Adding to rising rates is the seasonal factor;
February is also near the year’s trough for home purchases, cutting down on the
number of prepays related to housing turnover.

Borrowers with credit scores between 620 and 719 are
currently prepaying their mortgages at the highest rate, while those with
scores above 720 are the lowest, slipping even below those with scores under
620 which have had the lowest rates for 97 of the last 98 months.  It is only the second time in more than 9
years that the 720+ borrowers have been at the bottom.  The single most important driver of prepays
in the under 620 score cohort is and has long been loan default

Black Knight says by matching their data with public
records they can demonstrate there are significant shifts not only in
prepayment activity but what drives that activity over time. During 2017 housing
turnover accounted for an average of 47 percent of prepayment activity each
quarter, up from 29 percent in 2016.  In
Q2 of 2017 it made up half, the largest such share since Black Knight started
tracking it in 2005.  The company says
that, given the rise in rates and the subsequent decline in the refinance pool,
it is likely that home sale activity will account for more than 50 percent of
prepays again in mid-2018. Cash-out refinances now accounts for more
prepayments than rate-term refinances, 28 percent of all SMM.  The company says that, as home sales become
the primary driver of prepayment activity, seasonality will become more
important to SMM and that rate will experience more fluctuations. 

The amount of equity available for homeowners to tap
is now the highest on record in terms of dollars, $5.4 trillion.  This is 10 percent higher than the prior peak
reached in 2005, but the practical availability of this money as a tappable
resource is mitigated by the fact that 75 percent of it is held by borrowers
with existing interest rates below the current prevailing 30-year rate.

As Black Knight Data & Analytics
Executive Vice President Ben Graboske said, “Tappable equity rose by
$735 billion over the course of 2017, the largest dollar-value calendar
year increase on record. Still, Americans seem more reserved in tapping their
equity than in years past, withdrawing less than 1.25 percent of all tappable
equity in Q4 2017 – a four-year low. Of that total, 55 percent was tapped via
HELOCs, the lowest such share we’ve seen since the housing recovery began.
However, as interest rates rise, it is likely that we will see the HELOC share
of equity withdrawals increase as well. 

“At the start of 2018, some 55
percent of all tappable equity was held by borrowers with first-lien interest
rates below the going 30-year rate.
Following the nearly 50 basis points rise
in interest rates we’ve seen since the start of the year, that share has
ballooned to 75 percent. While rising rates tend to dampen utilization of
equity in general, the market is poised for a strong shift toward HELOC
, as they allow borrowers to take advantage of growing equity while
holding on to historically low first-lien interest rates. Sixty-five percent of
total tappable equity – approximately $2.8 trillion – is held by borrowers with
credit scores of 760 or higher and first-lien interest rates below today’s
prevailing rate, which creates a large pocket of low-risk HELOC candidates.”

Recent cash-out refinances have also
displayed a relatively low level of risk, with an average credit score of 744
for borrowers taking out those refinances in 2017.  Borrowers pulled an average of $68,000 in cash
from their refinances resulting in a loan-to-value (LTV) ration of 66 percent.

The effects of the two hurricanes,
Harvey and Irma, that hit the mainland last fall continue to be felt in
national delinquency rates.
  Black knight
says there were still 139,000 storm related delinquencies in February, 128,000
of which are now serious.  While these
are down from their peaks, they are still pulling rates upward.  Without the hurricane effect 30-day
delinquencies would by down 76,000 from last February rather than up by 63,000
and the 72,000 year-over-year increase would have been a 56,000 decline.

The non-current rate without the
hurricanes would have approximated 4.67 percent; instead it is pulled higher by
27 basis points. The national serious delinquency rate is 25 basis points
higher than it otherwise would have been.

Black Knight says it is clear that
the lingering effects of the storms will be felt throughout the year, both in
the areas directly affecting, and in the national delinquency picture.

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