Refinance retention drops to 27 percent
Refinance portfolio retention fell four percentage points to 27 percent in the third quarter, National Mortgage News reported, driven by a surge in borrowers tapping home equity.
Rate-and-term refinance retention dropped nine percentage points to 30 percent, while cash-out retention held at 26 percent. Servicers retained just 15 percent of cash-out borrowers who took out loans in 2019 or earlier, according to Intercontinental Exchange data.
Borrowers chase equity access
Cash-out refinances accounted for 75 percent of all refinance portfolio attrition during the quarter. Homeowners were willing to give up historically low mortgage rates and take on higher monthly payments to extract cash.
“Traditional rate-based retention strategies aren’t effective for borrowers who are motivated by access to equity rather than interest rate savings,” said Bob Hart, president of mortgage technology at ICE. Servicers missed business opportunities by relying solely on in-the-money analytics, according to Andy Walden, head of mortgage and housing market research at ICE.
Record home equity totals
Borrowers held a record third-quarter high of $17.5 trillion in home equity, marking a 1.4 percent increase year over year. Tappable equity rose 1.2 percent to an average of $204,000 per borrower, which is a $16,600 jump from the previous year.
The number of equity millionaires reached a third-quarter record of 2.4 million mortgage holders, up 6 percent from the prior year. California led the country with 49 percent of equity millionaires, followed by New York at 8 percent and New Jersey at 6 percent.
Adjustable-rate mortgages climb
Adjustable-rate mortgages made up more than 10 percent of early October rate locks as the 30-year fixed-rate mortgage surged above 7 percent. The points-adjusted spread between 5/1 ARMs and 30-year fixed loans expanded from roughly 75 basis points in the summer to more than 100 basis points early last month.
That spread has since narrowed to about 87 basis points. Meanwhile, cash-out transactions accounted for roughly 14 percent of rate locks in recent weeks, and purchase loans represented 80 percent of rate locks.
Common questions about refinance retention and equity
What caused the drop in refinance retention?
Refinance retention dropped because borrowers sought equity access rather than interest rate savings. Servicers using traditional rate-based retention models failed to engage these homeowners.
Which state has the most equity millionaires?
California accounted for 49 percent of the country’s equity millionaires during the third quarter. New York followed at 8 percent and New Jersey at 6 percent.
How much tappable equity do borrowers have on average?
Tappable equity rose to an average of $204,000 per borrower, marking a $16,600 increase from the previous year while maintaining a 20 percent cushion.
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