Borrowers are drawing more equity out of their homes as home prices rise and mortgage interest rates fall; however, they are not doing so at the same rate seen in the pre-crisis years.
According to Black Knight Financial Services’ Mortgage Monitor report, borrowers tapped out about $22.6 billion in equity in the second quarter – the largest sum since the second quarter of 2009 but still nearly 80% lower compared with the peak seen in the third quarter of 2005.
The report further finds that about 42% of refinances in the second quarter were cash-out transactions.
It was the ninth consecutive quarterly increase in cash-out lending by both loan count and sum of equity draw.
In addition, 40% of rate/term refinances involved the borrower reducing the term of his or her original loan (e.g., 30-year to 20-year, etc.) during the second quarter.
Interestingly, about 73% of refinances so far this year have gone to borrowers whose prior mortgages were originated in 2009 or later.
The average credit score for a borrower doing a cash-out refinance in the second quarter was about 748, nearly 60 points higher than in the 2005-2007 period.
“The roughly 350,000 cash-out refinances in the second quarter accounted for 42 percent of all refinances in the quarter and marked the ninth consecutive quarterly increase in cash-out lending, not only by count, but also by the amount of equity tapped,” said Ben Graboske, executive vice president of Black Knight Data and Analytics, in a statement. “At $22.6 billion, that works out to approximately $65,000 in equity tapped per borrower.
“While that per-borrower number is slightly down from the first quarter – but $6,000 higher than one year ago – the $22.6 billion total is the largest equity sum tapped since the second quarter of 2009,” he said. “Just to put that into perspective, though, it’s still a nearly 80 percent lower equity draw than at the peak in the third quarter of 2005. And, given that we saw over $550 billion in tappable equity growth last year alone, this equates to borrowers only tapping into 15 percent of the growth in equity over the past 12 months, without even touching the $4.5 trillion balance in tappable equity available.
“All in all, it’s clear that cash-outs are helping to prop up the refinance market – their 42 percent share is up from only 30 percent in early 2015, when interest rates had also dropped,” Graboske added. “What’s more, refi volumes are down from 2015 – at least through the second quarter – but while overall they’re down nine percent from the first quarter of 2015, rate/term refinances are actually down 25 percent over that same period.”
With regard to the increase in the average credit score for cash-out refinance borrowers, Graboske said, “Today’s cash-out refinance borrowers continue to present a relatively low risk profile, historically speaking.
“The average credit score of 748 among the second-quarter cash-out refinance borrowers is 67 points higher than that of the low point recorded in the third quarter of 2006 and is, in fact, nearly 60 points higher than the overall average credit score from 2005 through 2007,” he said. “In addition, post-cash-out loan-to-value ratios remain low. At 66 percent, it’s slightly higher than in the first quarter, but it’s the second-lowest quarterly average recorded in over 11 years.
“This is nearly six percent below the 2005-2007 average and 10 percent below the highs recorded in late 2008,” he said. “In addition, while not specific to cash-out refinancing, we continue to see prudent behavior on the part of borrowers. Some 40 percent of the second-quarter rate/term refinances involved the borrower reducing their loan term – the highest share of term reductions since late 2013 or early 2014.”