– As of Q3 2017, approximately 42 million homeowners with a mortgage have nearly $5.4 trillion in equity available to borrow against, assuming a maximum 80% total loan-to-value ratio
– Over 80% of all mortgage holders now have available equity to tap via a first-lien cash-out refinance or home equity line of credit (HELOC)
– Under the recently passed tax reform plan, interest on HELOCs is no longer deductible, increasing the post-tax expense of such products for those who itemize
– HELOCs have been an attractive option for borrowers to utilize available equity without sacrificing low first- lien interest rates; with interest on these products no longer deductible, the value proposition has changed
– In many cases, for borrowers with high unpaid principal balances (UPB), taking out low-dollar lines of credit, the math still favors HELOCs
– However, for low-to-moderate UPB borrowers taking out larger amounts of equity – assuming interest on cash-out refinances remains deductible – the post-tax math may now favor such products instead, even if it results in a slight increase to first lien interest rates
The Data & Analytics division of Black Knight, Inc. released its latest Mortgage Monitor Report, based on data as of the end of November 2017. This month, Black Knight finds that tappable equity – the amount of equity available for homeowners to borrow against before reaching a maximum 80% total loan-to-value (LTV) ratio – is at an all-time high. However, as Black Knight Data & Analytics Executive Vice President Ben Graboske explained, recent changes to the US tax code may have implications for homeowners’ utilization of that equity. “As of the end of Q3 2017, 42 million homeowners with a mortgage now have an aggregate of nearly $5.4 trillion in equity available to borrow against,” said Graboske. “That is an all-time high, and up more than $3 trillion since the bottom of the market in 2012. Over 80% of all mortgage holders now have available equity to tap, whether via first-lien cash-out refinances or home equity lines of credit (HELOCs). We’ve noted in the past that as interest rates rise from historic lows, HELOCs represented an increasingly attractive option for these homeowners to access their available equity without relinquishing interest rates below today’s prevailing rate on their first-lien mortgages. However, with the recently passed tax reform package, interest on these lines of credit will no longer be deductible, which increases the post-tax expense of HELOCs for those who itemize. While there are obviously multiple factors to consider when identifying which method of equity extraction makes more financial sense for a given borrower, in many cases, for those with high unpaid principal balances who are taking out lower line amounts, the math still favors HELOCs. However – assuming interest on cash-out refinances remains deductible – for low-to-moderate UPB borrowers taking out larger amounts of equity, the post-tax math for those who will still itemize under the increased standard deduction may now favor cash-out refinances instead, even if the result is a slight increase to first-lien interest rates.
“As rates continue to rise and the cost associated with increasing the rate on an entire first-lien balance rises as well, the benefit pendulum will likely swing back toward HELOCs. Even so, the change could certainly impact HELOC lending volumes and loan amounts in the coming months and years. To a certain degree, the same question holds true for cash-out refinances, since tax debt for homeowners who will no longer itemize becomes generally more expensive without mortgage interest deduction in the equation. These refinances will likely be an attractive source of secured debt in the future, but increased post-tax costs may have a negative impact on originations. That said, it still remains to be seen whether and to what extent tax costs will impact borrower decisions in terms of either HELOCs or cash-out refinances. At this point, only time will tell.” The increase in equity, driven by rising home prices, has also continued to shrink the population of underwater borrowers who owe more on their mortgages than their homes are worth. The number of underwater borrowers declined by 800,000 over the first nine months of 2017, a 37% decline in negative equity since the start of the year. Only 2.7% of homeowners with a mortgage (approximately 1.36 million borrowers) now owe more than their home is worth, the lowest such rate since 2006. Though still elevated from pre-recession levels, the negative equity rate continues to normalize. Even so, home prices in large portions of the country remain below pre-recession peaks. While 36 states and 70% of Core Based Statistical Areas (CBSAs) have now surpassed pre-recession home price peaks, 43 of the nation’s 100 largest markets still lag behind.
As was reported in Black Knight’s most recent First Look news release, other key results include:
- Total US loan delinquency rate: 4.55%
- Month-over-month change in delinquency rate: 2.54%
- Total US foreclosure pre-sale inventory rate: 0.66%
- Month-over-month change in foreclosure pre-sale inventory rate: -3.15%
- States with highest percentage of non-current loans: MS, FL, LA, AL, WV
- States with lowest percentage of non-current loans: MT, MN, OR, ND, CO
- States with highest percentage of seriously delinquent loans: MS, FL, LA, TX, AL
Wall Street new year rally pauses as healthcare, bank stocks weigh
The benchmark S&P 500 opened lower for the first time in 2018 on Monday, as losses in healthcare and financial stocks cut short Wall Street’s strongest start to a year in a decade. The S&P and the Nasdaq last week recorded its strongest first four trading days in a year since 2006, and the Dow industrials posted its best since 2003. “We had a strong market in the past week, and what generally happens in the first week sets the trend for the remainder of the year. Now that it’s established, there could be some profit- taking,” said Peter Cardillo, chief market economist at First Standard Financial in New York. At 9:41 a.m. ET, the S&P 500 was down 2.84 points, or 0.10%, at 2,740.31. The Dow Jones Industrial Average was down 31.55 points, or 0.12%, at 25,264.32, and the Nasdaq Composite was down 4.19 points, or 0.06%, at 7,132.37. The Dow and the Nasdaq still eked out record highs briefly after open. The dollar inched higher against a basket of major peers with data showing that slower US jobs growth did little to dent expectations for further interest rate increases this year.
Capital Region totals exceed height of subprime crisis
A decade after the subprime mortgage crisis put millions of Americans out of their homes, dozens of houses are still falling into foreclosure each month in the Capital Region. The trend continues despite a much-improved economy, more-careful mortgage industry practices and an infrastructure of support that has been created for borrowers facing the loss of their homes. “We have noticed that the number of foreclosures have not gone back to pre-Great Recession levels,” said James Flacke, executive director of Better Neighborhoods Inc., a Schenectady nonprofit that provides assistance to homeowners facing mortgage foreclosure. Statistics compiled by ATTOM Data Solutions show the following combined foreclosure totals for Albany, Fulton, Montgomery, Saratoga, Schenectady and Schoharie counties:
The 2017 total is for 11 months — December numbers were not yet available. The other years count all 12 months. And the totals are only mortgage foreclosures by lenders — foreclosures by municipalities for nonpayment of taxes are not included.
The head of another non-profit that offers housing counseling, the Affordable Housing Partnership in Albany, said the foreclosure rate never really slowed after the subprime crisis. “The basic reasons are still loss of income, primarily, or health reasons, or divorce,” Executive Director Susan Cotner said. “The big economic downturn crisis has passed but still people struggle with their mortgages all the time.” ATTOM found that New York had the 10th highest rate of foreclosure among the 50 states as of September: one foreclosure for every 1,671 housing units. ATTOM also found that foreclosure activity of all types — default notices, repossessions and auctions — in the third quarter of 2017 was at its lowest level in 11 years nationwide. The Capital Region apparently has not been following the downward trend. There were 1,681 such notices issued in the Capital Region from Nov. 21 to Dec. 20, 1,500 one month earlier, and 1,528 two months earlier. They had been averaging about 1,400 a month.
Oil approaches 2015 highs on fewer US rigs, OPEC
Oil prices rose on Monday, coming close to new three-year highs on a slight decline in the number of US rigs drilling for new production and sustained OPEC output cuts. US West Texas Intermediate crude futures had risen to $61.94 a barrel by 1140 GMT, 50 cents above their last settlement. WTI last week reached $62.21, the highest since May 2015. Brent crude futures were at $67.95 a barrel, 33 cents above their last close. Brent hit $68.27 last week, the highest since May 2015. Traders said the gains were due to a slight decline in the number of US rigs drilling for new production. The rig count eased by five in the week to Jan. 5 to 742, according to data from oil services firm Baker Hughes. Despite this, US production is expected soon to rise above 10 million barrels per day, largely thanks to soaring output from shale drillers. Only Russia and Saudi Arabia produce more.
Trump expected to dilute Dodd-Frank in 2018
Analysts at Goldman Sachs think two issues will be the subject of reform in 2018. “First, a few smaller issues stand a good chance of enactment,” said the global analytics team in an email to clients. “Among these are health legislation that would incrementally stabilize the ACA and banking legislation that would make incremental changes to the Dodd-Frank Act. So, say “Adios, Dodd-Frank,” Goldman says the president is coming for you. Here’s the rest of the prediction: “Second, Congress faces new fiscal deadlines. Spending authority expires January 19 and the debt limit must be raised by March. These deadlines could lead to near-term uncertainty but are also likely to lead to some additional fiscal stimulus. We expect spending caps to be lifted and a third round of disaster relief funding to be approved as part of the process.”