The number of homeowners who could potentially benefit from refinancing has increased by 3 million in the last year according to Black Knight Financial Services' April Mortgage Monitor. Interest rates have dropped back in recent month while home prices have continued to rise, growing the pool of borrowers who appear to meet broad-based eligibility criteria for refinancing substantially.
Trey Barnes Black Knight's senior vice president of Loan Data Products, said, "Black Knight looked at the population of borrowers whose current interest rates - as well as credit scores and loan-to-value ratios - mark them as good candidates for refinancing. In February 2014, there were approximately 4.1 million borrowers who could both benefit from and potentially qualify for refinancing their mortgages. Through a combination of declining interest rates and increased equity among borrowers driven by home price increases, an additional three million borrowers now meet the same broad-based eligibility criteria as compared to one year prior." While the number had reached as high as 7.4 million in September 2014, as of the end of February 2015, there were a total of 7.1 million potential refinance candidates.
This however is a very rate sensitive group and a 50 basis point increase in mortgage interest could wipe out that 3 million borrower gain. In fact Barnes said, it was largely a 60 basis point decline in rates that brought those borrowers into the refinancible universe.
The rate of mortgage prepayments in recent months seems to indicate that some homeowners are planning to take advantage of the current situation. Prepayment speeds, typically an indication of refinance activity, jumped 31 percent in February as compared to January. They were also 75 percent above levels the previous February.
Barnes pointed to another finding from Black Knight's analysis. "Prepayment speeds of lower credit score borrowers - those with scores below 620 - are the lowest we've seen since starting to track this data in 2000. As a result, the average loan age for this group is 98 months, as compared to just 38 months and less for borrowers with credit scores of 750 and above."
The increased prepayment speeds also varied among investor categories. Private label securities showed a monthly increase of prepayment rates of 8.4 percent and a yearly rate of 18.7 percent, much lower than other investment groups. This, Barnes said, is likely tied to the fact that roughly 30 percent of active loans in private label securities have credit scores below 620.
The Monitor also took a close up look at 2014 real estate transactions. The analysis found that, even as overall home sales were down from 2013, traditional market sales were up compared to that year and at their highest level since 2007. This was due to a decrease in distressed sales, which dropped to their lowest levels since 2007. Nationally only 12.7 percent of real estate transactions were lender-owned properties (REO) or short sales, down from 17 percent in 2013 and a peak of 33 percent in 2011. Short sales were down by 45 percent in 2014 while REO sales fell by 16 percent.
Short sales are currently discounted an average of 23 percent from market prices (meaning they are selling at $0.77 on the dollar, down from a peak discount of 25.3 percent in July 2013. REO discounts now average 27 percent, the highest since the fourth quarter of 2012. These discounts peaked at 29 percent in April 2009
The highest percentage of distressed sales in 2014 were in Florida at 25 percent of all transactions in that state. In fact, Florida accounted for 26 percent of all distressed sales in the United States. Florida and three other states with the largest share of distressed sales, (California, Illinois, and Michigan) together accounted for over half of all such transactions last year.
Looking at what Black Knight calls "the bubble states," Arizona, California, Florida, and Nevada, those most impacted by the housing bubble and its aftermath, Florida's level of distressed sales is improving at the slowest rate. The other three have seen a reduction in their share of distressed sales of 79 percent or more from their peaks, Florida has seen only a 54 percent decrease.
The distressed sale discount in Florida, while lower than the national average, is also higher than in other bubble states, 24.4 percent. The state also has the highest remaining rate of 90+ day delinquent loans and loans in foreclosure (6.5 percent) of any bubble state and ranks fourth nationally in this regard behind New Jersey (8.4 percent), New York (6.8 percent) and Mississippi (6.7 percent). Florida has also seen the lowest level of home appreciation of any of the major bubble states since the market hit bottom. Prices there have risen 30 percent as compared to 35, 41, and 51 percent for Arizona, California, and Nevada respectively.
Black Knight points out that, among the bubble states, Florida is the only one with a judicial foreclosure process.