Tappable Equity Skyrockets, But HELOC Loans Decline

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This month’s Mortgage
Monitor Report
from Black Knight, Inc. is again about equity, but this time
with a twist
regarding the way homeowners are treating it.  The company says that the tappable equity
held by homeowners increased by $820 billion dollars over the 12 months that
ended in March, $380 billion in the first quarter of 2018 alone. Those numbers
equate to 16.5 percent growth year-over-year, and 7 percent for the quarter. 

Equity growth is generally highest in the first and
second quarters of the year, but the first quarter growth this year was up 30
percent from the same quarter in 2017.  It
was the highest single-quarter increase recorded by Black Knight since it began
keeping records in 2005. 

Tappable
equity is the share of equity that a homeowner can borrow before reaching a
maximum combined loan-to-value (CLTV) ratio of 80 percent.  That equity now totals $5.8 trillion
nationwide, the highest volume every recorded and 16 percent higher than at the
mid-2006 peak.  The majority – nearly 80
percent – of the tappable equity nationwide is held by borrowers with mortgage
rates under the current prevailing rates of around 4.5 percent and 60 percent have
rates under 4 percent.  The average mortgage holder gained $14,700 in tappable
equity over the past year and has $113,900 in total available equity to borrow
against.

 

 

Current CLTVs average 52 percent, the lowest ever
recorded by Black Knight. This means that about 70 percent of the growth in home
prices, 2.5 percent in the first quarter or about $6,900 for a median-priced
home, becomes immediately available to be tapped under an 80 percent CLTV limit,
another post-recession high. 

Black Knight says homeowners sitting on large amounts
of tappable equity and with now-enviable first mortgage loan rates should be a
prime audience for home equity lines of credit
(HELOC) loans.  And lenders presumably would love them have
them.  They are a relatively low-risk
group, 70 percent of equity holders with low interest mortgages have credit
scores above 760.  Yet, these homeowners
are not biting.

 

 

Homeowners with first mortgages withdrew $63 billion
in equity via either HELOCS or cash-out refinances in the first quarter of the
year, a 7 percent decline from the previous quarter.  The company notes that the first quarter is
generally the year’s low point for cash-out lending, so the decline itself is
not surprising.  Yet there was only a 1
percent increase from the first quarter of 2017, despite the more than 16
percent increase in the available pool of equity over the same period.  Of the $5.4 trillion in that pool at the
beginning of the quarter, borrowers tapped a total of 1.17 percent; the second
lowest level of borrowing since the recovery began.  And even though rising interest rates normally
favor HELOC borrowing, the volume of equity withdrawn this way dropped 1
percent year-over-year, to a two-year low while cash-out withdrawals are up 5
percent.  HELOCs accounted for 56 percent
of equity withdrawn during the quarter.

 

 

Black
Knight says the new tax law may have had a small impact on HELOC lending. It
limits interest rate deductions in some cases, but it is not the primary
driver of the subpar HELOC performance

The share of equity drawn down by these loans has been on the decline
for three years even as the cash-out share of withdrawals has remained steady.  Another factor may be interest rate shock as happened
with the “taper tantrum” in 2014 when interest rates rose a point in under a
year and equity withdrawal dropped sharply.

The  primary
driver, according to Ben
Graboske, executive vice president of Black Knight’s Data & Analytics
division, is the increasing spread between first-lien mortgage interest rates -
which are tied most closely to 10-year Treasury yields – and those of HELOCs -
which respond to the federal funds rate. “As of late last year, the difference
between a HELOC rate and a first-lien rate had widened to 1.5 percent, the
widest spread we’ve seen since we began comparing the two rates 10 years ago.
The distance between the two has closed somewhat in Q2 as 30-year mortgage
rates have been on the rise, which does suggest the market remains ripe for
relatively low-risk HELOC lending expansion. Still, increasing costs in the
form of higher interest rates do appear to have impacted homeowners’ borrowing
decisions in Q1 2018. We should also remember that the Federal Reserve raised
its target interest rate again at its June meeting, which will likely further
increase the standard interest rate on HELOCs in Q3 2018. Black Knight will
continue to monitor the situation moving forward.”

Turning to
refinances, the Monitor notes that their
number in the first quarter was down 21 percent from both the fourth quarter of
2017 and that entire year.  However,
there was a notable difference in behavior and volume of rate/term refinances
and those featuring a cash-out component. 
The former fell 34 percent quarter-over-quarter and 48 percent on an
annual basis, while cash-out versions were down 13 percent for the quarter and
rose slightly compared with Q1 2017. Cash-out refis made up 70 percent of all
refinances in the first quarter and accounted for 74 percent in March, the
highest monthly share in nearly 10 years, but falling short of the 84 percent
recorded in 2006.

 

 

Forty-five
percent, about 186,000, of those who took a cash-out refinance in the first
quarter had to increase their interest rate, taking an average hit of 70 basis
points. They also tended to withdraw the largest amount of money. Of those who
did see a rate reduction, it averaged 21 basis points, the lowest savings since
2007.

 

 

Black Knight
concludes that, as short-term rates continue to rise, it appears as though traditional
HELOC candidates may be opting for cash-out refinances instead. If this is the
case, a counter-intuitive picture emerges. 
“Federal funds rate increases may actually be buoying the refinance
market.”



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