Borrowers take most cash-out from properties in nearly 12 years

More than half of the third quarter refinance activity was the cash-out variety, with borrowers removing the most total equity from their homes in nearly 12 years, according to Black Knight.

Refinance volume nearly doubled since hitting an 18-year low in last year's fourth quarter, Ben Graboske, Black Knight's data and analytics president said in a press release.

"The bulk of that increase was driven by people refinancing to improve the rate or term on their current mortgage, with five times the number of such rate/term refis as there were in the fourth quarter of 2018," he said. "Cash-out refinances were up as well, although by a more modest 24% over the same period. Still, cash-outs made up 52% of all third quarter refinances, with homeowners withdrawing more than $36 billion in equity, the highest amount withdrawn via cash-outs in nearly 12 years."

But it pales in comparison to the over $100 billion of equity withdrawn in cash-out transactions in the third quarter of 2005.

Borrowers held about $6.2 trillion of tapable equity at the end of the third quarter, down from the second quarter's $6.3 trillion but up from $5.9 trillion one year earlier. Moreover, home equity line of credit rate offerings are coming in at an average of 2.9% higher than those for the 30-year fixed mortgage, Black Knight said.

Given those two factors, "this is a segment lenders and servicers may likely focus on in coming months. Any upward movement in rates would likely only drive the cash-out share of lending higher," Graboske said.

Previously Black Knight reported the highest prepayment percentages during October in nearly six years.

Broken down, the largest cohort of loans prepaying in October came at a 3.82% rate from the 2018 vintage, according to the Mortgage Monitor report. That echoes the findings from the private mortgage insurers, which reported an increase in their overall business from borrowers refinancing recently originated low down payment loans. The second largest group came from 2014 at 1.95%, while 2017 was third at 1.93%.

Because of the increased prepayment activity along with a resurgent refi market, loans originated so far this year now make up 17% of the total active mortgage market, Black Knight said.

However, those newly refinanced loans are not going to borrowers' previous mortgage servicer, Graboske said.

"Just 22% of borrowers stayed with their servicer post-refinance in the third quarter," he said. "The business of nearly three of every four rate/term refinance borrowers — historically an easier segment to retain — was lost, with servicers retaining just 26% of borrowers, down from 29% in the second quarter.

"Cash-out borrower retention was even more dismal, though, as servicers lost more than four out of every five borrowers post-refinance. That's the lowest retention rate among that segment in more than two years," he continued.

Servicers retained 19% of their borrowers that did a cash-out refi during the third quarter.