American homeowners got $ 20,000 richer in the second quarter just sitting in their family room. Black Knight’s latest Mortgage Monitor says this was the average increase in borrowers’ equity during the quarter as home prices continued to skyrocket.
Vulnerable equity, the amount available to homeowners before they hit a maximum combined loan-to-value ratio (CLTV) of 80 percent, hit a record $ 9.1 trillion, an increase of $ 1 trillion in a single Quarter. The average mortgage holder increased their tangible equity by $ 20,000 to a total of $ 173,000 during this period.
The weighted average CLTV for the mortgage market is now 46 percent, its lowest leverage in history. Less than 3 percent of homeowners with mortgage loans have less than 10 percent equity and only 0.6 percent are underwater, both record highs.
The stock growth is also good news for both homeowners financially affected by COVID-19 and their lenders. Of the borrowers (an estimated 1.75 million) who were on moratorium as of mid-August, at least 98 percent had 10 percent equity or more in their home. Black Knight says this is a drastically different dynamic than during the worst of the Great Recession, when more than 40 percent of all mortgage holders had less than 10 percent equity and 28 percent were completely submerged
Even when deferred principal, interest, tax, and insurance payments are added to their debt, possibly for up to 18 months, only 7 percent of deferred borrowers (130,000) fall below a 10 percent equity position. FHA and VA borrowers account for 90,000 of these.
Black Knight Data & Analytics President Ben Graboske said, “Such strong equity positions should help limit the volume of distressed inflows into the real estate market and provide a strong incentive for homeowners to return to mortgage payments – even if they are reduced by need to be change. ”
And in terms of forbearance, Black Knight says 97 percent of borrowers who abandoned their plans in 2020 either resumed their payments (64 percent) or paid off their mortgages by refinancing or selling their homes.
However, the performance of the most recent plan exits has shifted noticeably. A third of borrowers who left their plans in the past 45 days remain with their servicers in post-forbearance loss mitigation, although this is to be expected given the time it takes servicers to get through the post-forbearance falls Cope with borrowers. No more than 7 percent of borrowers who got out in any given month are delinquent or in active foreclosure that is not also in loss mitigation.
Black Knight says keeping a close eye on the performance of the recent exits is warranted, as it is evident that those who stayed longer in the Forbearance may have been more affected by the pandemic and at a higher risk of default after the Forbearance .
Going back to the sizeable equity gains, Black Knight says it seems homeowners are more willing to tap into that paper wealth with cash-out refinancing. In view of the expected interest rate hikes, it is likely to play a greater role in the overall refinancing market.
Despite a 5 percent decline from the previous quarter, the second quarter marked the fourth straight quarter with over $ 1 trillion in total mortgage loans. The purchases totaled $ 440 billion, the highest quarterly figure ever recorded. It was also the 5th consecutive quarter with at least 2.2 refinances. Of that, more than 1.1 million were paid out, the largest in 15 years, and more than $ 63 billion in equity withdrawn, most since mid-2007.
Black Knight says some anticipated shifts are beginning. The refi share of lending fell to 58 percent in the second quarter and the cash-out share rose sharply from 37 percent in the first quarter to 49 percent. The company calls this “typical behavior” when interest rates begin to rise and warns that lenders and service providers should be aware of this ongoing trend and adjust their product and retention strategies accordingly, even though the withdrawn equity is still relative to available levels is conservative.
While the number of refinances declined in the second quarter, service providers improved their balance sheet on holding borrowers and retained 28 percent of all refinances in the quarter, the largest proportion since the pandemic began. The servicers kept the loans of 34 percent of the rate / term refinances and 21 percent of the borrowers withdrew cash. The rate / commitment rate was the highest since 2017 and the payout rate rose from 18 percent in the last half of 2020.
Servicers were noticeably more successful in refinancing borrowers from the 2019-2020 vintage mortgages at 38 percent compared to other vintages, probably due to a recent credit relationship with these borrowers. These two years made up almost a third of all refis, with 20 percent in 2019 alone, a time when the 30-year rates had skyrocketed and were considerably higher than today.
Banking service providers had withheld a much smaller proportion of refinancing in the first few months of the pandemic. Their retention rate fell from 24 percent in the fourth quarter of 2019 to 16 percent at the end of 2020. One of the reasons for this was that banks shied away from the market due to increasing payment defaults and economic uncertainty. At the same time, the retention rates of the mortgages held in the portfolio – mainly driven by banks that issue jumbo loans – fell from 37 percent to 22 percent. Both segments rebounded in the first half of 2021, with bank service providers’ retention rates rising to 22 percent and portfolio retentions to 30 percent, suggesting that banking service providers are re-entering the market with a focus on retaining their refinancing borrowers.
Overall, non-banks have been significantly more successful in retaining refinancing borrowers since the beginning of 2017, with retention rates in the second quarter being a whopping 11 points higher than those of banks
From an investor perspective, FHA / VA loans have the highest retention rates, with a third of borrowers who refinance these mortgages being withheld by their service provider. The aforementioned improvement in portfolio retention puts these servicers in second place.