Black Knight’s Deep Dive Into Equity, Forbearance, and the Future Rate Environment
Last year was a record
setting one when it comes to mortgage origination according to Black Knight’s January
Mortgage Monitor. It puts the total volume of originations during 2020
at $4.3 trillion, the highest in the company’s records. Refinance originations,
to no one’s surprise were also at an all-time high of $2.8 trillion and $1.5
trillion in purchase loans was originated, the largest annual volume since
2005. The fourth quarter also made history with all-time single quarter highs
for purchase mortgages at $346 billion and refinancing at $869 billion. In
total, $1.3 trillion worth of mortgages were originated during the quarter.
Even though the record
low mortgage interest rates, which paved the way for such a spectacular year,
have been rising in recent weeks, Black
Knight says 2021 at least got off to a promising start. The company examined lock
activity through the middle of February and says, assuming a 45-day lock to
close timeline, first quarter refinance activity can be expected to remain at
those late 2020 levels. Purchase locks in the first half of February were up 6
percent compared to January and 37 percent year-over-year while refinance locks
in that early February period edged back by about five percent from January but
were still more than double the volume of that same two-week span in 2020.
Black Knight says it
expects impacts from the rising rates to begin late in this quarter or early in
the next. The 30-year conforming rate has increased 35 basis points since the
first of the year, 25 basis points in the last two weeks alone.
With those rising rates, there has also
been a drop-off in high-quality refinance candidates. As of March 4, with Freddie
Mac reporting a rate of 3.02, the refinance pool is at 12.9 million potential
borrowers. This is down from 18.1 million on February 11, a 29 percent decline
in just three week and the
smallest that population has been since May 2020.
That rate locks have
increased, Black Knight says, could indicate the rising interest rates may have
spurred formerly procrastinating homeowners to act. By the end of March, the company
expects 2.8 million homeowners will have refinanced, but this same data
suggests a 25 percent decline from the 4th quarter in purchase
activity. This would result in an overall 10 percent quarterly decline.
While the company expects
refinancing to be strong for a while longer, servicers’ performance in
retaining those borrowers is getting worse. Only 18 percent of the estimated 2.8
million homeowners who refinanced in the fourth quarter stayed with their
servicers, the lowest retention rate on record. Servicers were slightly more
successful in hanging on to those doing rate/term refinancing (23 percent) than
those who were taking cash out, only 11 percent of which were retained. Those
higher credit quality rate and term refinancers who were not retained got a new
mortgage rate more than 1/8th of a point lower than those who
remained with their servicer.
Eight percent of Q4
refinances had taken out their mortgages earlier in 2020, but the largest
volume by vintage was the 20 percent with an existing mortgage originated in
2019. They were also the most likely to stay with their servicers with a
retention rate of 24 percent.
Black Knight reports on participation
in the COVID-19 related forbearance programs every week, but the Mortgage
Monitor delves more deeply into some of the program’s impacts. The number
of active plans continues to decline, but so does the rate at which homeowners
are leaving the program. About 600,000 plans are set to reach their fourth and
what was to be their final expiration at the end of the mouth, but the
availability of plans has now been extended, at least for FHA, VA, and GSE
programs, to the end of September and the Monitor says it is unclear
what to expect this month. At both the three-month and six-month term
expirations significant numbers of homeowners exited, but at the 9-month point that
termination activity significantly underperformed expectations.
Of the remaining 2.7
million borrowers in forbearance, 23 percent (625,000) had their first forborne
payment in April 2020 and another 13 percent (355,000) in May. Those two
cohorts will dictate both the size and timing of final forbearance expirations.
At this point the rate of improvement among those early enrollees has dropped
to 3 percent a month. Black Knight says homeowners who have remained in the
program this long may well remain for the duration of the program, however long
that might be.
Equity has been held out as
providing an exit ramp for distressed homeowners, something that didn’t exist
in such large numbers in the housing crisis. In the third quarter of 2020 the
rapid growth of home prices meant that only 10 percent of forborne homeowners had
less than 10 percent equity in their homes, typically, the Monitor says,
the minimum amount necessary to be able to sell the home in a traditional
manner to avoid foreclosure.
But, over 18 months of
forbearance, the average homeowner would accrue $12,300 in unpaid interest and,
for those who already have less than 10 percent equity, the total would be
$14,900. In addition, there would also be an average of $9,000 in unpaid taxes
and insurance premiums. This would push the share of borrowers with limited
equity to 18 percent – higher (perhaps 29 percent) among FHA/VA borrowers who tend
to have higher combined loan-to-value ratios.
These calculations do not
factor in further home price growth. Borrowers also have the option of deferring
payback until the home is sold, refinanced, or reaches maturity, which
potentially allows lots of time for equity to grow.
Forbearance appears to have
been a source of relief for many. Of 6.9 million homeowners who entered the
program, 61 percent (4.2 million) have exited and 3.7 million of those are
either back to performing on their loans or have paid them off. Of those who
have exited but remain delinquent, 282,000 (4 percent) are in loss mitigation.
That percentage was 7 percent three months ago, suggesting that servicers are
working through that population. Another 171,000 borrowers (3 percent) are neither
in mitigation nor forbearance, but 107,000 of those were delinquent prior to