No Surprise: Sale/Refi Incentive Highest for 2008 Loans

Mortgage prepayments have picked up over the last three months as interest rates pulled back from recent highs.  Black Knight Financial Services said today that the rate of prepayment which is closely associated with refinancing, was at 0.9 percent in May.  The rate had dropped to around 0.6 percent at the end of 2013 and the beginning of this year.

Black Knight's monthly Mortgage Monitor pointed to the 2008 vintage of mortgages as having the highest refinance rate, hovering around 1.5 percent in both April and May.  While pre-2008 vintages had interest rates higher than the 5.63 percent average (based on a 30-year fixed rate mortgage) of loans originated in 2008, the rate of prepayment was lower, around 1.1 percent.  Prepayment rates for post 2008 vintages, while much below that of 2008 and the average interest rates much lower, trended higher as well over the March to May period.

Though refinance activity is still down significantly from the levels seen in 2012 and early last year, it has increased 21 percent since January 2014. Black Knight also found that seasonal purchase activity has picked up, with approximately 897,000 purchase originations through April, a level on par with 2013 (898,000 over the same period), and better than 2012 (847,000). 

Credit scores for both purchase and refinance loans remain largely unchanged as do loan-to-value standards with two exceptions.  Credit scores for Freddie Mac and Fannie Mae (GSE) refinancing and refinancing through GNMA have dipped appreciably since last fall. 

In the full Mortgage Monitor Black Knight expanded on foreclosure data it released last month in its "early look." 

Foreclosure starts reversed an eight month trend in May, rising 9.5 percent in May to 86,000.  Even with the increase, foreclosure starts are down 32 percent from the same period in 2013 and are at the lowest point since 2007.  New Jersey was the only state where foreclosure starts in May exceeded those in May 2003. Foreclosure starts peaked nationally in May 2009 at 316,000.   As has almost always been the case throughout the foreclosure crisis, most starts are on loans that have been delinquent for a protracted period of time.

"While foreclosure starts did rise over 9 percent in May, it's important to remember the historical trend is still one of improvement," said Kostya Gradushy, Black Knight's manager of Loan Data and Customer Analytics. "On a year-over-year basis, January through May foreclosure starts were still down 32 percent, and we are still looking at the lowest level of foreclosure starts in seven years. Additionally, over half of these starts are repeat foreclosures, rather than new entries into the pipeline, That is, these are loans that had been in foreclosure, shifted back to either current or delinquent status by way of modification, repayment plan or some action by the borrower, but have now fallen into foreclosure once again. Almost 80 percent of May's foreclosure starts were from 2008 or earlier vintage loans." 

Completed foreclosures or foreclosure sales were less than half of starts and continued their downward trend.  Sales totaled 42,000, representing a 3.4 percent decrease from April and down from a peak of 124,000 sales in September 2010.

The foreclosure inventory also continued to shrink and was down to 1.91 percent of mortgaged properties in May.  Delinquencies are also at 6-year lows.  After peaking at 10.57 percent in January 2010, the national delinquency rate is now 5.62 percent.

Home price appreciation continues to help drive down the share of borrowers underwater on their mortgages. As of April, the share of loans in negative equity positions had declined to 8.9 percent. However, the situation is significantly worse for loans either seriously delinquent (90 or more days past due) or in foreclosure. Black Knight found that 78 percent of this subset of distressed loans had combined loan-to-value ratios of 100 percent or more.

Finally, the Mortgage Monitor said there is a growing lack of incentive for current homeowners to sell their homes.  Man, even where equity is positive, do not have significant enough to allow for a downpayment on a trade-up home.  Others have current low interest rates they would not be able to match with a new purchase loan.  For an estimated 49 percent of homeowners, both of those disincentives apply.