– 44% of Q4 refis were cash-outs, most equity drawn in eight years
– Annual home price appreciation of 5.5% in 2016 helped raise number of – US mortgage holders with tappable equity to 39.5 million
– 68% of tappable equity belongs to borrowers with current interest rates below today’s 30-year interest rate; 78% belongs to borrowers with credit scores of 720 or higher
– $31 billion in equity extracted via cash-out refinances in Q4 2016 was up eight% from Q3 and 50% year-over-year
– Resulting post-cash-out refinance loan-to-value (LTV) ratio of 65.6% was lowest on record, with an average credit score of 750
The Data and Analytics division of Black Knight Financial Servicesreleased its latest Mortgage Monitor Report, based on data as of the end of February 2017. This month, Black Knight revisited the equity landscape, finding that continued annual home price appreciation at the national level has helped to both further drive down the number of underwater borrowers and increase the level of tappable, or lendable, equity available to homeowners with a mortgage. As Black Knight Data & Analytics Executive Vice President Ben Graboske explained, today’s equity landscape – in conjunction with a higher interest rate environment – will likely impact mortgage lending trends over the coming year. “December 2016 marked 56 consecutive months of annual home price appreciation,” said Graboske. “That served to not only lift an additional one million formerly underwater homeowners back into positive equity throughout the year, but also increased the amount of tappable equity available to US mortgage holders by an additional $568 billion. There are now 39.5 million homeowners with tappable equity, meaning they have current combined loan-to-value (CLTV) ratios of less than 80%. Cash-out refinance data suggests that they have been increasingly tapping that equity, though perhaps more conservatively than homeowners had in the past. In Q4 2016, $31 billion in equity was extracted from the market via first lien refinances. While that was the most equity drawn in over eight years, borrowers are still tapping equity at less than a third of the rate they were back in 2005, and they’re doing so more prudently. In fact, the resulting post-cash-out loan-to-value-ratio was 65.6%, the lowest on record.
“However, it’s important to remember that we’ve also seen prepayment speeds – which are historically a good indicator of refinance activity – decline by nearly 40% since the start of 2017 in the face of today’s higher interest rate environment. Given the fact that nearly 70% of tappable equity belongs to borrowers with current interest rates below today’s prevailing 30-year interest rate, the incentive for many of these borrowers is shifting away from tapping equity via a first lien refinance and instead to home equity lines of credit. The last time interest rates rose as much as they have over the past few months, we saw cash-out refinances decline by 50%, but rate-term refinances decline by 75%. Based on past behavior, we may see a decline in first lien cash-out refinance volume, but it’s still likely that cash-out refinances – and purchase loans – will drive the lion’s share of prepayment activity over the coming year in any case. That’s why it’s so critical that those in the industry ensure that their prepayment models account for refinancing not just in terms of rate/term incentive, but also equity incentive as well. Additionally prepayment models will need a stronger focus on housing turnover as purchase transactions become a larger fraction of total prepayments.” Black Knight looked more closely at the nearly 40% decline in prepayment speeds thus far in 2017, finding varying degrees of impact by investor category, loan vintage and borrower credit score. While the GSE, FHA/VA, and portfolio markets have all seen prepayment activity decline between 41 to 43% since the start of the year, prepays on mortgages held in private-label securities have only dropped by seven%. Likewise, prepayments on older loans – 2008 and earlier vintages – have only slowed by 11%, whereas 2014-2015 vintage loans have seen prepays drop by over 50%. Prepays on loans with borrower credit scores of 720 or higher dropped by 45% year-to-date, while those on mortgages with borrower credit scores below 620 declined by less than a quarter of that rate. The data also shows far more geographical diversity in 2017 than was seen in late 2016, with western states – along with Florida – leading the nation in prepayment rates. A correlation was observed between the states with the highest prepayment rates today and the lowest mark to market combined loan-to-value ratios, which would suggest that cash-out refinances may be driving a higher share of prepayment activity in these states. These states tend to have higher-than-average loan amounts for the most part, which may be a factor as well.
As was reported in Black Knight’s most recent First Look release, other key results include:
- Total US loan delinquency rate: 4.21%
- Month-over-month change in delinquency rate: -0.98%
- Total US foreclosure pre-sale inventory rate: 0.93%
- Month-over-month change in foreclosure pre-sale inventory rate: -1.88%
- States with highest percentage of non-current loans MS, LA, AL, WV, NJ
- States with the lowest percentage of non-current loans: ID, MT, MN, CO, ND,
- States with highest percentage of seriously delinquent loans: MS, LA, AL, AR, TN
America’s love affair with SUVs, trucks continued in March
America’s love affair with SUVs and trucks continued in March as General Motors, Honda and Nissan reported sales increases for both. But that’s being offset by falling car sales, pushing overall sales for Honda and Ford down compared with last year. Ford experienced a big sales drop for the month, falling 7.5% from March of 2015. Honda’s sales also were off, by 2%. GM reported nearly a 2% gain, while Nissan sales were up just over 3%. Most major automakers report sales through the day on Monday. Despite falling sales for Honda and Ford, industry analysts expect a 2% to 3% increase for the industry overall in March, the first monthly sales jump this year, and possibly the best March in 17 years. At Ford, car sales fell a staggering 24%, due in part to big fleet sales reported in March of last year. SUV sales fell 3%, but truck sales rose 2.5%, led by a 10% increase sales of the F-Series pickup, the top-selling vehicle in America. General Motors, the nation’s top-selling automaker, reported a 2% gain led by small and midsize SUVs with a 21% increase. Truck sales rose 0.5%. Sales of most GM cars were down, except for the compact Cruze, with sales nearly doubling from last year. Chevrolet Silverado pickup sales fell nearly 12%, but that was offset by smaller SUVs. For example, the Buick Encore compact SUV saw a 29% increase. Honda said its March sales fell just under 1%, dragged down by sagging demand for its Acura luxury brand. Car sales were off 8.7%, while truck and SUV sales rose 8.4%. Honda brand sales were up 2%, and Acura sales down more than 21%. The company sold nearly 33,000 CR-V small SUVs, a 23% gain. Nissan’s overall sales rose 3.2% with trucks and SUVs rising 29% for the Nissan and Infiniti brands combined. Nissan was once again led by the Rogue small SUV, which set a March sales record of nearly 40,000 vehicles for a 20% increase. Car sales fell 15%.
Olick – homeowners are pulling cash out again; this time it’s the millennials
Fast-rising home prices gave homeowners more equity than many expected, and they are now tapping that equity at the fastest rate in eight years. Homeowners gained a collective $570 billion throughout 2016, bringing the number of homeowners with “tappable” equity up to 39.5 million, according to Black Knight Financial Services. Those borrowers have at least 20% equity in their homes. But the fact that mortgage rates were lower last year makes it less likely today’s borrowers would want to refinance this year. About 68% of tappable equity belongs to borrowers with mortgage rates below today’s levels. The vast majority of these borrowers, more than three-quarters, also have FICO credit scores well above average, which gives them more options for cashing out on their homes. Enter the HELOC. Home equity lines of credit are second loans taken outside the primary mortgage, and millennials are leading the pack to cash in. “The last time interest rates rose as much as they have over the past few months, we saw cash-out refinances decline by 50%,” said Ben Graboske, executive vice president at Black Knight. He expects to see more HELOCs instead. And more millennials are using HELOCs than Gen-Xers or baby boomers, according to a survey by TD Bank. In fact, more than a third of millennials said they are considering applying for a HELOC in the next 18 months, which is more than twice the rate as Gen-Xers and nine times that of baby boomers. “We were a little surprised about that,” admitted Mike Kinane, general manager of home equity products at TD Bank. “I think millennials are taking a more conservative approach, but they recognize that HELOCs have a good purpose, especially for remodeling.”
Home remodeling was the No. 1 reason for taking out a HELOC last year, according to TD Bank, with debt consolidation coming in second. The home remodeling industry has seen a huge boost in the last year, as home prices rise and the supply of homes for sale shrinks. Homeowners are finding it harder to find and afford a suitable move-up home, so they’re increasingly choosing to stay and remodel. Millennials are entering the housing market more slowly than previous generations, and those who have in the past few years tended to buy cheaper fixer-uppers. In just a few years, however, they’ve gained enough equity from rising prices to be able to pull cash out and remodel. They are, however, still very conservative. Borrowers doing cash-out refinances last year still had close to 35% equity left in their home, the lowest on record, with an average credit score of 750, according to Black Knight. Borrowers are still using HELOCs at barely one-third the rate they did in 2005. Cash-out refinances accounted for nearly half of all refinances in the last quarter of 2016, as homeowners withdrew $31 billion. That was the most since 2006 and represented a 50% increase from the same quarter of 2015. Millennials appear to be more focused on value than amenities. Close to half said they would renovate their homes to increase value, according to TD Bank, while other generations said they wanted the house to look more “up to date.” Millennials seem to want to avoid leveraging their homes the way their parents did, choosing to hold on to more equity and try to grow it as much as possible. Banks are also more conservative in offering these loans, but Kinane said a lot of homeowners are still leaving a lot of money on the table … or in the home. “Customers are borrowing a lot less than they could borrow if they needed to,” he added.
US factories expand again in March but at slower pace
American factories expanded for the seventh straight month in March but at a slightly slower pace than they did in February. The Institute for Supply Management says its manufacturing index slipped to 57.2 last month from 57.7 in February. But anything above 50 signals growth, and the March reading was slightly better than economists expected. New orders and production grew more slowly last month, but hiring and new export orders grew faster. Seventeen of 18 manufacturing industries grew in March, led by makers of electrical equipment and appliances. American factories have bounced back after being hurt in early 2016 and late 2015 by cutbacks in the energy industry, a reaction to low oil prices and a strong dollar, which makes US products costlier in foreign markets.
Student loan debt may mean fewer homeowners, expensive schools, and less consumer spending, Fed’s Dudley says
Rising student loan debt in the United States could ultimately hurt overall home ownership and consumer spending and erode colleges’ and universities’ ability to elevate lower-income students, a top Federal Reserve policymaker said on Monday. New York Fed President William Dudley, an influential monetary policymaker who was citing research from his institution, pointed to rising costs of higher education and student debt burdens as culprits in the troubling trend. Overall US household debt is expected to surpass its pre-recession high later this year. Proportionally, Americans have shifted away from housing-related debt and toward auto and student loan debt, with aggregate student loan balances $1.3 trillion at the end of last year, up 170% from 2006. Dudley, whose Fed monitors economic indicators but who does not have any control over fiscal policies like college funding, noted that overall delinquency rates “remain stubbornly high” and repayments have slowed, even while the job market improved the last few years. There are “potential longer-term negative implications of student debt on homeownership and other types of consumer spending,” he said at a news conference. “Continued increases in college costs and debt burdens could inhibit higher education’s ability to serve as an important engine of upward income mobility, (and) these developments are important and deserve increased attention.” The New York Fed data showed a shift among lower-income borrowers to auto and student loans, and away from mortgages, and that higher debt levels bring about lower homeownership rates. Dudley added that sharp rises in the value of housing and stock prices, jobs growth and moderate strength in wages mean that, overall, “the household sector’s financial condition today is in unusually good shape for this point in the economic cycle.” He did not comment on interest rates in his prepared remarks.