Negative equity share drops under 8%; HELOC problems loom
Recent, record-low reductions in the average 30-year mortgage interest rate have expanded the population of borrowers who could benefit from refinancing by nearly 25%, according to the latest mortgage monitor from Black Knight Financial Services.
“Before the most recent reductions in the average 30-year mortgage interest rate, approximately six million borrowers met broad-based ‘refinancibility’ criteria,” said Trey Barnes, Black Knight’s senior vice president of Loan Data Products. “These criteria assume loan-to-value ratios of 80% or below, good credit, non-delinquent loan status and current interest rates high enough that borrowers have an incentive to refinance. In light of where rates are today, and looking at borrowers with current notes at 4.5% and above, that population has now swelled to 7.4 million – almost a 25% increase.
“This is a relatively conservative assessment though, as those with current rates of 4.25 to 4.5% could arguably benefit from refinancing as well. That group adds another 1.7 million borrowers to the population,” Barnes said. “On a related note, we also examined how the equity situation in America has changed since we last looked. Due in no small part to 28 consecutive months of home price appreciation since 2012, we’ve seen the share of borrowers with negative equity drop down to just below eight% as of July, down from a level of 33% at the end of 2011, and to its lowest point since 2007.”
An additional 8.5% of borrowers are in ‘near-negative equity’ positions, with less than 10% equity in their homes. However, more than half of all borrowers have 30% or more equity, a level not seen in nearly eight years.
Black Knight also looked again at currently active HELOCs, and – based on estimated 10-year draw periods – found that only 7.74% of active HELOCs had begun amortizing entering 2014.
Through 2018, nearly an additional 80% will end their draw periods, resulting in average payment increases of $262 per month.
The most effective way of avoiding payment shock is to refinance a HELOC into a new loan or line of credit, but nearly 30% of HELOCs set to reset through 2018 are either in negative equity or near negative equity positions, making refinancing problematic.