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Tappable Equity, Refi Incentive Hit Record Highs While Cash-Outs Fall

Tappable Equity, Refi Incentive Hit Record Highs While Cash-Outs Fall

Some important highlights on tappable equity and the refinance landscape from Black Knight’s most recent Mortgage Monitor Report:

Tappable Equity of U.S. Mortgage HoldersFirst, tappable equity – the amount available to homeowners with mortgages to borrow against while still maintaining at least 20% equity in their homes – rose by 8% year-over-year in the first quarter of 2020 to a record high of $6.5 trillion.

With mortgage interest rates hitting record lows in recent weeks, 90% of homeowners with tappable equity are now “in the money” for a refi, meaning they have first lien rates above the prevailing market average. What’s more, more than three quarters have rates above 3.5%, providing a significant opportunity for homeowners to tap into available equity while at the same time improving upon their current interest rate.

Distribution of Tappable Equity

 

But, while record-low rates drove overall Q1 2020 refinance lending to a 7-year high, at the same time – despite the record levels of equity available to homeowners – both the number of cash-outs and the volume of equity tapped via refis fell for the first time since early 2019.

And the cash-out share of overall refinance lending dropped as well, to just 42% of Q1 refis. For context, that’s roughly half of what we were seeing as recently as Q4 2018 and the lowest share since Q1 2016.  Likewise, the $38.7B in equity withdrawn via cash-outs was down 8% from Q4 2019.

 

Refinance Rate Locks v. 30-year interest rates

Rate lock data – a good indicator of lending activity – suggests this trend is likely to continue, as the cash-out share of refis has continued to fall throughout Q2. In fact, through June 19, cash-out refi locks were down 6% from the comparable time frame in Q1 2020, while locks by homeowners refinancing for a better interest rate or loan term were up 13% – even considering the massive refi wave of early March.

Last month, we reported on how the fallout from COVID-19 had impacted the population of refinance candidates (cutting nearly 4% of homeowners due to being past due – in or out of forbearance – who would have otherwise qualified). As a reminder, Black Knight defines refinance candidates as 30-year mortgage-holders who are current on their mortgage payments with 720+ credit, 80% max LTV and who can shave at least 0.75% off their first lien rate.

Even accounting for delinquencies chipping away at that population, some 13.6 million homeowners still met those criteria at the time we were putting the Mortgage Monitor to bed. But then, on Thursday morning, Freddie Mac reported that 30-year fixed rates hit yet another record low (3.07%). This increased the refinance candidate population by 20% from just last week, to hit an all-time high of 16.3 million.

Refinance Candidates under 30-year fixed rate scenarios

Together, these refinance candidates could save an aggregate of $4.5 billion by refinancing, also an all-time high. That’s some $54 billion dollars in potential savings annually, representing a significant economic stimulus in a time of widespread uncertainty. Of those 16.3 million homeowners who could both benefit from and likely qualify for a refinance, 1.8 million stand to save $500 or more per month by refinancing.

Black Knight will continue to track both the population of refinance candidates and actual refinance lending over the coming months. Past editions of the Mortgage Monitor report can be found here.