Mortgage Monitor Shows Reversal in Strong Q1 Refi Demand

While the trend will likely continue to reverse in the next few reports, refinancing, as a share of total originations, made an impressive recovery through the first quarter of 2015 after falling off the pace in 2014.  Black Knight's April Mortgage Monitor reports that, while the refinancing share dropped back slightly in April, refinancing accounted for over 50 percent of originations, hitting a high of 56 percent at one point in the quarter. 

The reason for this was of course an unexpected drop in interest rates, down 70 basis points from a year earlier, providing what the Monitor describes as a "very interest rate sensitive population" with an additional incentive to refinance.   Black Knight estimates there are now about 7 million potential refinance candidates compared to 4.5 million a year ago but a 50 basis point increase in rates would result in a 43 percent reduction in refinance candidates - approximately 3 million borrowers.

While the interest rate climate was encouraging refinancing, the Monitor reports that standards for doing so have been tightening.  Average loan-to-value ratios are dropping and average credit scores are rising.  Over the past 18 months credit scores on refinance originations have increased 19 points to a weighted average of 762 while LTVs have dropped to 65 percent.

The percentage of refinance originations for borrowers with credit scores over 740 has risen from 55 percent in the first quarter of 2014 to 68 percent in the same quarter of 2015 while those with credit scores under 640 which had accounted for 6 percent of originations in that earlier period have since dropped back to only 3 percent.  Borrowers in the middle - scores between 680 and 739 - have lost ground as well, dropping from 28 percent of refinance originations in Q1 of 2014 to 23 percent in the most recent quarter.

Lending requirements remain tight for purchasing as well.  The weighted average credit score in the first quarter of this year was 751 and the LTV was 81 percent, both marginally higher than a year earlier.

The Monitor's data on delinquencies and foreclosures showed a slight seasonal 1.46 percent uptick in the former to a national rate of 4.77 percent.  Foreclosure starts were down 22 percent for the month and 7 percent year-over-year, and the foreclosure inventory fell by 18,000 properties to 764,000, down a quarter million from the same period in 2014.

Thirty-day delinquencies are were down 11 percent year-over-year and are now below pre-crisis rates at 2.12 percent.  Sixty-day delinquencies, at 0.77 percent are just slightly above pre-crisis norms.  Delinquencies of 90 days or more remain at double pre-crisis levels of .88 percent at 1.9 percent but significantly lower than at the peak of 5.4 percent in January 2010.

Among loans that are both seriously delinquent and in foreclosure, an estimated 1.7 million, 480,000 or 28 percent are located in Florida, New York, or New Jersey and the states represent  three out of the top five for this metric (Mississippi and Main are number three and four by percentage).  They are the top three by volume.

Black Knight Data & Analytics Senior Vice President Ben Graboske said, "Of these three states, Florida has seen the most improvement, with a 37 percent decline in inventory over the last year, and a 63 percent drop over the last two years.  On the other hand, low foreclosure completion rates in New York and New Jersey have contributed to lingering inventory in those states. Looking at pipeline ratios - the length of time it would take to work through the backlog at the current rate of foreclosure completions - we see New York and New Jersey with nearly 13 and nine years of inventory, respectively. Even though Florida peaked with 20 percent of the entire state being 90 or more days past due, its pipeline ratio was never longer than 10 years and is currently the lowest among all the judicial foreclosure states at just under three years. Compare that to Washington, D.C., which uses a non-judicial foreclosure process and a comparatively very small backlog inventory, yet still has a pipeline of over 43 years, primarily due to extremely low foreclosure sales volume there."

Black Knight estimates there are now approximately 952,000 seriously delinquent loans that are not yet in foreclosure.  The April Monitor looks at the history of those loans vis-à-vis actions taken to prevent foreclosure. 

The number of foreclosure modifications and other retention actions completed by servicers has fallen by 42 percent over the last two years. Retention actions include trial modifications, repayment plans, and permanent HAMP and proprietary modifications.  At the same time the percentage of delinquent loans that have been modified at least once continues to rise.  Sixty-two percent of the seriously delinquent loans, have undergone one or more retention action, a 9 percent increase over the last two years. 

This finding is not surprising.  As delinquencies continue to shrink, either as loans are brought current, homes are sold by their owners, or are liquidated through foreclosure, those loans that have been most resistant to remediation remain.

Further, the report says that 70 percent of new trial modifications or payment plans are repeat actions.  Looking back to 2011, only about 45 percent of trials and repayment plans were repeat actions

"In analyzing the data around home retention initiatives, we found that nearly one in five seriously delinquent borrowers are currently taking part in an active trial modification or payment plan," Graboske said.  "With 62 percent of loans 90 or more days delinquent but not yet in foreclosure having been through some form of home retention action, we're currently seeing the highest level of saturation yet, but that's only marginally up from last year - in other words, that saturation level is beginning to flatten. Overall, home retention actions have declined 42 percent over the past two years, but at the same time have increased nine percent as a share of that seriously delinquent inventory. We're also starting to see some redundancy in this activity - 70 percent of all new trial modifications and repayment plans have already been through one or more home retention actions previously."

Looking at this home retention data on a geographic level, Washington, D.C., led the nation with 67 percent of its seriously delinquent inventory having gone through some sort of home retention activity; of these, 26 percent are currently in an active trial modification or repayment plan. Maryland, Georgia, Texas and Connecticut followed; all with 66 percent of seriously delinquent loans having a history of home retention action.   Among loans in active foreclosure about 53 percent had taken part in home retention initiatives.