The August Mortgage Monitor report released by Lender Processing Services Inc. (LPS) found that prepayment activity (historically a good indicator of mortgage refinance activity) declined sharply in August as mortgage rates continued to rise. In conjunction with those rate increases, a large portion of borrowers has been effectively shifted out of the “refinancible” population. However, at the same time, according to analysis done by LPS, rising home prices and corresponding levels of equity for many borrowers may translate into opportunity for the home equity loan and lines of credit market.
“We have seen prepayments decline by more than 30 percent since May, when mortgage interest rates began climbing approximately 100 basis points to where we are today,” LPS Senior Vice President Herb Blecher said. “As a result, the percentage of borrowers currently in loans with interest rates high enough for refinancing to make fiscal sense has decreased significantly. Over half of borrowers are now ‘out of the money’ with respect to refinancing. In December 2012, the population of potentially refinance-eligible borrowers stood at roughly 10 million. However, refinance activity during that time, along with rising interest rates, have shrunk that pool to just
5.7 million borrowers as of August.
“While higher interest rates may certainly have the effect of tamping down refinance activity, they may actually wind up contributing to a new appetite for home equity loans among homeowners,” Blecher continued. “After bottoming out at the beginning of 2012, home prices are now at their highest levels since 2009, and borrowers who bought or refinanced within the last few years are quite likely to have accumulated additional equity in their homes. Based upon LPS’ analysis of historical borrowing patterns and home value trends, it is possible that we could see an increase in second-lien borrowing among those who have locked in their first mortgages at very low rates and who wish to tap their equity without refinancing into a higher rate.”
This month’s Mortgage Monitor also looked at foreclosure pipelines at both the national and state levels. Though national pipelines have been steadily decreasing due to both an increase in foreclosure sales and declining foreclosure starts, pressure is still growing or extreme in many states. New York, a judicial state, still has the largest pipeline ratio based on the very limited volume of current foreclosure sales in that state, but certain nonjudicial states have seen dramatic increases in the wake of passing foreclosure-related legislation or rulings.
California, for example, has seen its pipeline ratio increase nearly 70 percent since that state’s Homeowners Bill of Rights went into effect at the beginning of this year. Likewise, Massachusetts has seen an increase of 136 percent (to 168 months) since a Q2 2012 state Supreme Court ruling slowed the process significantly there. As reported in LPS' First Look release, other key results from LPS' latest Mortgage Monitor report include:
►Total U.S. loan delinquency rate: 6.20 percent
►Month-over-month change in delinquency rate: -3.31 percent
►Total U.S. foreclosure presale inventory rate: 2.66 percent
►Month-over-month change in foreclosure presale inventory rate: -5.74 percent
►States with highest percentage of non-current loans: FL, MS, NJ, NY, ME
►States with the lowest percentage of non-current loans: MT, CO, WY, SD, ND