At more than $5.4 trillion, “tappable” borrower equity reached an all-time high in the fourth quarter of 2017, according to the latest “Mortgage Monitor” report released by Black Knight's data and analytics division.
Based on available data through the end of February 2018, the report indicates that as home prices have continued to increase so has the amount of “tappable, or lendable, equity available to Americans with mortgages,” the company said in a press release.
Black Knight defines “tappable equity” as the total amount of available equity a homeowner with a mortgage can borrow against before reaching a maximum loan-to-value ratio (LTV) of 80 percent.
Black Knight Data and Analytics Executive Vice President Ben Graboske attributed the record amount of tappable equity to rising home prices.
“As home prices continued their upward trajectory at the national level, the amount of tappable equity available to homeowners with mortgages continued to rise as well,” Graboske said. “Tappable equity rose by $735 billion over the course of 2017, the largest calendar year increase by dollar value on record. At $5.4 trillion, total tappable equity is also the highest on record and 10 percent above the previous, pre-recession peak in 2005.”
An estimated $262 billion in tappable equity was withdrawn in 2017 through cash-out refinances and home equity lines of credit (HELOCs), according to the findings, which also represents a new post-recession high.
“Still, Americans seem more reserved in tapping their equity than in years past, withdrawing less than 1.25 percent of all tappable equity available in Q4 2017 – a four-year low,” Graboske said. “Of that total, 55 percent was tapped via HELOCs, the second lowest such share since the housing recovery began. However, as interest rates rise, it is likely that we will see the HELOC share of equity withdrawals increase as well.”
Borrowers with first-lien interest rates below the 30-year average held roughly 55 percent of all tappable equity at the beginning of 2018, Graboske noted.
“Following the nearly 50 basis points rise in interest rates we’ve seen since the start of the year, that share has ballooned to 75 percent,” he said. “While rising rates tend to dampen utilization of equity in general, the market is poised for a strong shift toward HELOCs, as they allow borrowers to take advantage of growing equity while holding on to historically low first-lien interest rates. Over half of all tappable equity – approximately $2.8 trillion – is held by borrowers with credit scores of 760 or higher and first-lien interest rates below today’s prevailing rate, which creates a large pocket of low-risk HELOC candidates.”
The report also indicated relatively low risk among cash-out refinance originations. The average cash-out refinance borrower in 2017 had an average credit score of 744 (down from 750 in 2016) and pulled $68,000 in equity (up from $64,000) with a resulting LTV of 66 percent, according to the report’s findings. Approximately 40 percent of remaining cash-out refinance candidates – those borrowers with both tappable equity and current first-lien rates of 4.5 percent or higher – have credit scores above 760. As borrowers with higher credit scores tend to have higher average equity amounts, approximately 50 percent of all tappable equity among borrowers with first-lien rates of 4.5 percent or higher is held by that group.