Equity, Refinancibility, and HELOC Concerns -Mortgage Monitor


Equity got some close scrutiny in the
current edition of Mortgage Monitor, a
monthly publication of Black Knight Financial Services.  The company used its first and second lien
mortgage databases to analyze current active mortgages to discover both the
state of the “refinancible population” as well as the nation’s overall equity

The Monitor
looked at how the equity situation has changed in recent months.   Trey
Barnes, Black Knight’s senior vice president of Loan Data Products says, “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 percent as of July, down from a level of 33
percent at the end of 2011, and to its lowest point since 2007. An additional
8.5 percent of borrowers are in ‘near-negative equity’ positions, with less
than 10 percent equity in their homes. However, more than half of all borrowers
have 30 percent or more equity, a level not seen in nearly eight years.”


are, however, a lot of homebuyers taking out mortgages that are under-equitied
from the start.  About 18 percent of
purchase mortgages have a loan-to-value ratio of 96 to 100 percent.  The majority of these are financed through
FHA’s low down payment programs.



Recent reductions in the average 30-year
mortgage interest rate, according to the Monitor
have expanded the population of borrowers who could benefit from refinancing by
nearly 25 percent
.  Before these
decreases there were an estimated 6 million homeowners who were “in the money”
in terms of being able to benefit from refinancing and appearing by virtue of
their credit scores and loan to value ratios of being capable of doing so.  Recent reductions have made refinancing
feasible for another 1.4 million, those with current rates between 4.50 and
4.75 percent.  At the same time rising
prices have increased the numbers of those with sufficient equity to do so.


says 7.4 million potential refinancers might be a relatively conservative
assessment as even those with current rates of 4.25 to 4.50 percent, another
1.7 million homeowners, could arguably benefit from refinancing. 

does not necessarily mean desirable.  According
to the Mortgage Bankers Association, the average rate for a 30-year fixed rate
mortgage in its last survey of lenders was 4.17 percent.  Given the large number of these “in the money”
homeowners who currently have interest rates below 5.5 percent there might not
be anywhere near 7.4 million sufficiently motivated by the prospect of shaving off
another 50 to 150 basis points.   

every firm that analyzing mortgages from any perspective has expressed concern
about the numbers of home equity lines of credit (HELOCs) that are nearing the
end of their draw-down periods and Black Knight is no exception.  Huge numbers of HELOCs were originated near
the end of the housing boom, from 2003 to 2006 and most were structured to
allow the homeowners to write a check against the loan’s line based on the home
value at origination and make payments of interest only, usually tied to the
prime rate.  At the end of ten years the ability
to draw on the line ends and the loan begins to amortize.  It is feared that the increasing amount of
the payments, the loss of homeowner equity that use of the lines has enabled,
as well as the inability to draw on the loans to make the increased payments on
the loan will lead to another wave of delinquencies and foreclosures. 



Knight estimates that only 7.74 percent of active HELOCs had begun amortizing
by the beginning of this year.  Through
2018 an additional 80 percent will end their draw periods and there will be an
average increase in monthly payments (payment shock) of $262 per month.  Homeowners don’t have an easy path to
refinance their way out of problems either as nearly 30 percent of these
maturing loans are in negative or near negative equity position.



Monitor says that conditional prepayment rates (CPR) on HELOCS historically
increase following the expiration of the draw period.  CRP is the percentage of total principal that
is prepaid on a pool of loans in a given time period.



also historically become problematic after the expiration of the draw.  Previous vintages of HELOCs have seen a spike
in new non-current loans about one year after they have were due to begin
amortizing.  This spike then translates
into extended periods of elevated delinquencies although these delinquency
rates thus far have been modest compared to those seen earlier among both prime
and subprime first mortgages. 



Knight released its Mortgage Monitor foreclosure and home price data for
September in its “First Look” preview late last month.  However a couple of related tables in the Monitor are worth a look.  The first is a graphic representation of the
dwindling rate of home price appreciation over 28 straight months of
gains.  Homes were appreciating
at an annual rate of 9.1 percent at the peak in August 2013.  By this past August that rate had fallen to
4.9 percent, still enough to bring home prices back to within 10.1 percent of
the June 2006 peak.



of course the gains were not evenly distributed nor have they diminished at the
same rate everywhere.  Eighteen states
have surpassed their pre-recession home price peaks with the greatest gains in California
and Arizona, along with Michigan, North Dakota, Florida, and Georgia.  The Monitor looked at four states – two which
have been benefitting from the energy boom and two that showed huge gains as
their foreclosure crises ended but have now settled into a different pattern. .  In Texas the rate of appreciation has
continued virtually unchecked while Colorado’s has slowed but only
marginally.  In Arizona the rate of
appreciation is approaching zero while the California rate has been cut by more
than half.



we suspect that many are sick of hearing about home price appreciation, the report
did have two other interesting takes on the subject.  One is a graphic showing the differing appreciation
among states using judicial and non-judicial foreclosure processes.  We assume this is because of the overhang of
homes in both the foreclosure and bank owned real estate inventories in
judicial states.



other is a map showing how long it will take each state to climb back to 2006
price levels presuming the current national appreciation rate of 4.9 percent


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