Tappable home equity hit all-time high in 1Q, but fewer accessed it

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The dollar amount of tappable home equity reached an all-time high in the first quarter, but even with record-low interest rates, fewer borrowers took cash out of their properties, Black Knight said.

While borrowers may not have taken advantage of favorable conditions in the first three months of the year, credit tightening related to the pandemic has impacted cash-out refinance volume in the second quarter.

There was $6.5 trillion in tappable equity available in the first quarter, an 8% year-over-year increase. Furthermore, 90% of current mortgage borrowers have a first lien loan with an interest rate above the prevailing average.

"But while the first quarter saw overall refinance lending climb to a seven-year high, the number of cash-out refinances, as well as the dollar value of equity withdrawn via refinance, fell for the first time since early 2019," said Ben Graboske, president of Black Knight's data and analytics division. "All in, cash-outs accounted for just 42% of refinance loans in the first quarter, roughly half of what was seen at the recent high in the fourth quarter of 2018 and the lowest such share since the first quarter of 2016. Likewise, the $38.7 billion in equity withdrawn from the market via cash-out refinances was down 8% from the prior quarter."

Rate lock data for the second quarter showed that cash-out refis continued to decline, down 6% on a quarter-to-quarter basis through June 19, Graboske said.

However, the first quarter's total cash-out refi dollar volume is higher than it was between 2009 and 2016. In addition, the current share of cash-outs is still high when compared with much of the period between 2009 and 2016.

During the housing boom, many homeowners used their equity as a piggy bank to pay for items like vacations and cars. After the crash, many of those borrowers were left without equity in their properties.

The legacy of that event still colors the view of many potential cash-out customers.

The spike in cash-out share during 2018 was more a factor of higher interest rates putting the kibosh on rate and term refinance activity.

And some regulatory events could have had an effect on cash-out activity. In 2018, Ginnie Mae looked to slow down the number of recently originated Veterans Affairs mortgages that were becoming cash-out refis.

A year later, the Federal Housing Administration changed the loan-to-value ratio of cash-out refis it would insure to 80% from 85%. Around the same time, Ginnie Mae revised its eligibility requirements for VA cash-out refis to be put in its securities.

The second quarter's decline in cash-out refi volume was largely due to credit tightening by lenders and within the secondary market. Impacting the secondary market in particular, was the Federal Housing Finance Agency ban on the government-sponsored enterprises purchasing cash-out refis that went into forbearance prior to the loan being purchased by Fannie Mae and Freddie Mac.

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