Volume still 80% below 2005 levels
Cash-out refinances were up 68% year-over-year from the second quarter of 2014, as borrowers take advantage of still-low rates and newfound equity in their homes, according to Black Knight Financial Services.
This is the highest volume of cash-out refinancing in five years, but still nearly 80% below the peak in 2005.
As Black Knight Data & Analytics Senior Vice President Ben Graboske explained, borrowers have been capitalizing on increased equity available in their homes and still historically low rates.
“In the second quarter of 2015, we saw cash-out refinance volumes rise almost 70% from the same period last year,” said Graboske. “While this is the highest volume in cash-out refinances we’ve seen in five years, it’s still nearly 80% below the peak in Q3 2005. Even so, it’s clear that borrowers have been capitalizing on the increased equity available to them.
“As we reported in last month’s Mortgage Monitor, total equity of mortgage holders has risen by about $1 trillion over the last year, and ‘tappable’ equity stands at $4.5 trillion,” he said. “Borrowers today are pulling out an average of $67,000 of equity through cash-out refis, nearly the levels we saw back in 2006. What’s really interesting though, is that even after pulling out that equity, resulting average LTVs are at 68%, the lowest level we’ve seen in over 10 years.”
He said that during this same time span, second lien HELOC lending rose, albeit at a lesser rate—that volume is up 40% from last year. However, as interest rates rise, there could be an increase in HELOC lending and corresponding slowing in first lien cash-out refis, as borrowers will likely want to hang on to lower rates for their first mortgage while still being able to tap available equity.
In its analysis of refinance transactions in comparison to prior loans, Black Knight also found that the distribution of cash-out refinances is highly concentrated geographically, with over 30% of all such transactions occurring in California alone.
Texas is second among states in terms of cash-out refinance volume, at just 7% of the nation’s total. Looking at Q2 2015 refinances in general, the data shows that borrowers are saving an average of $136 in principal and interest each month through refinance and cutting their interest rates by just over one%; the lowest such reductions in nine and five years, respectively.
These low averages are primarily due to the fact that borrowers refinancing are either lower unpaid balance (UPB) borrowers that haven’t yet taken advantage of low rates (and who will see lower monthly savings), or higher UPB borrowers that are taking advantage of low rates for a second or third time, and so are seeing incremental savings as compared to earlier reductions. Black Knight also observed increased interest among borrowers in securing term reductions through refinancing, with 34% of rate/term refinances in Q2 2015 including a term length reduction.
Of particular interest to banks and mortgage servicers, this month’s Mortgage Monitor also looks at the increased foreclosure timelines introduced by Fannie Mae and Freddie Mac, and the potential impact those extensions have had on compensatory fee exposure. In addition to the 34 states where extensions have been introduced, the compensatory fee moratorium currently in place in New York, New Jersey, Massachusetts, and Washington, D.C., was extended from June until Dec. 31, 2015.
New York and New Jersey alone carry two-thirds of the country’s compensatory fee exposure, even though these states only account for 27% of active GSE foreclosure inventory. All totaled, the states covered by the existing moratorium account for 74% of remaining compensatory fee exposure, and the foreclosure timeline extensions result in roughly a 38% reduction of gross compensatory fee exposure in non-moratorium states. Lifting the moratorium – with timelines remaining as they stand now – would result in nearly a quadrupling of mortgage servicers’ compensatory fee exposure.