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Refinancing on the decline, home equity on the rise

Refinancing through the government-sponsored program, which has been streamlined and re-branded over the past year, was down significantly from early 2013, with fewer existing loans eligible for the program, as well.

The number of U.S. homeowners eligible for refinancing plans is apparently shrinking, according to a recent report focusing on borrowers who own residential property.

In its most recent Mortgage Monitor Report, Black Knight Financial Services revealed that, through January 2014, mortgage originations had declined considerably and the total population in a position to refinance their home loans – either through the Home Affordable Refinance Program or by more traditional means – was also dwindling. The report also found that associated loan origination volumes were similarly on the decline. A 60 percent dip in loan originations brought them to their lowest level since November 2008, HousingWire reported.

Despite those curious figures, property sales remained relatively strong through the fourth quarter of 2013 and, even after harsh winter weather swept across the Midwest and much of the Northeast, into the first month of 2014. For the year, sales were up 8.4 percent from 2012 to 2013, a figure driven heavily by the continued influence of cash purchasers and large-scale institutional investors. Those sort of buyers accounted for more than 40 percent of fourth-quarter sales, according to Black Knight, leaving many economists and housing market analysts to wonder how sustainable the current rate of growth may be.

"In January, we saw origination volume continue to decline to its lowest point since 2008, with prepayment speeds pointing to further drops in refinance-related originations," said Herb Blecher, senior vice president of Black Knight Financial Services' division of data and analytics. "Overall originations were down almost 60 percent year over year, with HARP volumes down 70 percent over the same period."

Equity gains driving loan market
The decline in HARP originations was perhaps the most eye-opening figure. Refinancing through the government-sponsored program, which has been streamlined and re-branded over the past year, was down significantly from early 2013, with fewer existing loans eligible for the program, as well. In January 2013, some 2.3 million property owners were eligible to refinance their mortgages under HARP. A year later, that population had been whittled to about 709,000.

Those figures may be at least partially attributable to renewed equity, which is suddenly possessed by many residents of major metro areas that have seen rapid rates of price appreciation. People are once again above the water line in greater number, and as a result, are more frequently taking money out of their homes. According to Black Knight data, 2013 marked the first year since 2006 that home equity lending had increased. Still, while home equity lending rose 26 percent from 2012 to 2013, it remained 90 percent below the pre-recession rate of 2006. That figure actually offers many analysts some reassurance, as it helps ease fears that another housing bubble could be forming out of the price gains seen in places like the Bay Area, Boston, Los Angeles, Phoenix and San Diego.

Additionally, the decline in originations is correlated with a lending environment wary of the potential for rising mortgage interest rates. The number of borrowers with an incentive to refinance their home loans is drastically reduced when interest levels increase, a phenomenon that's only expected to gain steam as the Federal Reserve proceeds with its tapering plans for the quantitative easing program throughout this year.

"Of course, in addition to higher interest rates, a good deal of this decline can be attributed to the fact that a majority of those who could refinance at historically low rates in recent years already have, and we see a similar dynamic in terms of HARP-eligible loans," Blecher noted. "The volume of HARP refinances over the past year has driven this population down to about 700,000 loans in January 2014, as compared to over 2.3 million at the same time last year."

Sustainable growth
Property sales activity has remained relatively strong through the end of 2013 in terms of both year-over-year and month-to-month comparisons, especially when taking the weather considerations into account. The effects of home value gains are being seen in a variety of forms, with Black Knight noting in particular that the resurgence in home equity originations remains concentrated among "super-prime" borrowers, whose credit scores for first- and second-lien home equity lines of credit average 786 and 779, respectively. Loan performance measures have reflected that concentration, with delinquency rates on home equity lines of credit over the past four years averaging a meager 0.1 percent.

Of course, the other factor playing a role in the price gains is that of inventory levels, which remain low nationally and dangerously thin in some of the aforementioned, overpriced metro regions. New construction rates have been stagnated by a number of influences, most notably the high costs for permits and building materials, but also because the polar vortex caused a freeze on many projects slated for takeoff during the winter months. The hope is that come spring, more construction starts will lead to more available supply, and ultimately, a healthier, more sustainable rate of price appreciation.