The December 2023 ICE Mortgage Monitor Report, released today by Intercontinental Exchange Inc., shows rising home prices, though cooling in recent months, have returned total tappable equity to near its 2022 peak. However, just 0.41% of tappable equity available at the beginning of the quarter was withdrawn in Q3, some 55% below the average withdrawal rate seen from 2010-2021.
This has implications for both equity lending and performance-related risk among active mortgages, ICE Vice President of Enterprise Research Andy Walden said. “Despite the resurgence in tappable equity among U.S. mortgage holders, elevated interest rates are making homeowners reluctant to extract that wealth,” Walden said.
“In recent quarters, equity withdrawal rates have been running at less than half their long-run averages. Mortgage holders extracted a mere 0.41% of tappable equity available at the beginning of Q3. That’s some 55% below the average withdrawal rate seen in the 12 years leading up to the Fed’s most recent tightening cycle. That’s equivalent to $54 billion – $250 billion over the last 18 months – in ‘missing’ withdrawals that might have otherwise stimulated the broader economy.”
Along with other factors, rising equity levels are contributing to low default and foreclosure activity in today’s market. As Walden notes, any specter of a potential wave of foreclosures must be tempered by a recognition of borrowers’ generally strong equity positions – including the most seriously delinquent among them.
“Though they hit an 18-month high in October, foreclosure starts remain 35% below pre-pandemic norms,” he continued. “Lenders and servicers have many more options for working with borrowers to avoid foreclosure today than at almost any point in the past. Just to illustrate the scope: 70% of loans currently three or more payments past due are protected from foreclosure by ongoing loss mitigation efforts. Further, 58% of these seriously delinquent mortgage holders hold more than 20% equity stakes in their homes.
“Strong equity cushions not only provide borrowers incentive to work with their servicers to return to making mortgage payments, but they also open up other options, such as salvaging earned equity with a traditional home sale rather than going through foreclosure. The more the industry can do to educate, and update, borrowers as to their equity positions, the better. Loss mitigation can be much more successful when a borrower can make educated and informed decisions, fully aware of the options available to them.”
The month’s data also showed that while overall refinance activity remains a shadow of what it was just a couple of years ago, what’s left is almost entirely equity-centric. Cash-outs accounted for 92% of all refinances in Q3, with borrowers withdrawing a record $104,000 on average, up from just $65,000 two years ago.
Purchase loans continue to dominate, driving 86% of Q3 activity, and are expected to account for roughly 75% of all mortgage lending in 2024. Interest rate pressures continued to mount, however, with purchase loan debt-to-income ratios hitting multiyear highs in October.
ICE Market Trends data, which tracks originations across the ICE Mortgage Technology platform, shows an overall tightening of lending criteria, with credit scores among conventional, FHA, and VA purchase loans all hitting series highs in October. The average FHA score has risen 14 points over the past 12 months, with VA scores up 13 points during that same period.
