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 situation.
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."
There 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.
Barnes 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.
Beneficial however 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.
Virtually 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.
Black 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.
The 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.
Loans 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.
Black 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 nationally 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.
But 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.
While 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.
The 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 continues.